Cost of Equity (CAPM) Calculator
Estimate the cost of equity with the Capital Asset Pricing Model from the risk-free rate, beta and the expected market return.
How it works
Re = Rf + beta × (Rm − Rf) · where Rm − Rf is the equity risk premium
The Capital Asset Pricing Model prices the return investors demand for holding a stock as the risk-free rate plus a premium for its market risk. Beta scales the market’s equity risk premium: a beta above 1 means the stock swings more than the market and therefore commands a higher required return, while a beta below 1 lowers it. This cost of equity feeds directly into WACC and discounted-cash-flow valuations.
Worked example
With a 4% risk-free rate, a beta of 1.2 and a 10% expected market return, the equity risk premium is 10% − 4% = 6%. Cost of equity is 4% + 1.2 × 6% = 4% + 7.2% = 11.2%.
Frequently asked questions
What is beta?
Beta measures how much a stock moves relative to the overall market. A beta of 1 moves in line with the market; 1.5 amplifies market moves by 50%; below 1 dampens them. Higher beta means higher required return under CAPM.
What is the equity risk premium?
It is the extra return investors expect from the stock market over the risk-free rate — the expected market return minus the risk-free rate. Historically it has averaged roughly 4–6% in developed markets.
What is cost of equity used for?
It is the return shareholders require, used as the equity component of WACC and as the discount rate in dividend-discount and equity valuation models.
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Educational estimate, not investment advice. Trading forex, futures and options carries substantial risk of loss.