Cost of Equity Calculator: CAPM & DDM Methods for Financial Analysis
The calculator lets you estimate a company’s cost of equity via CAPM or DDM: enter three numbers, press calculate, read the required return. U.S. stocks have delivered a 10.1 % average annual return since 1926 (Ibbotson SBBI Yearbook, 2023).
Cost of Equity Calculator
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How to use the tool
1 Select method
CAPM—works for any stock, dividend-paying or not.
DDM—best for firms with stable, growing dividends.
2 Enter the three inputs
CAPM fields
Risk-Free Rate %: e.g., 3.2 % or 1.9 %.
Beta: e.g., 0.90 or 1.45.
Expected Market Return %: e.g., 10 % or 7.8 %.
DDM fields
Next-Year Dividend $: e.g., 2.10 or 1.65.
Current Stock Price $: e.g., 52.00 or 68.50.
Dividend Growth Rate %: e.g., 4.5 % or 6.2 %.
3 Read the result
The tool displays the cost of equity as a percentage—higher values signal greater investor return demands.
WACC appears in 90 % of corporate valuations (PwC Valuation Survey, 2021).
FAQ
What is cost of equity?
Cost of equity is the return shareholders expect for bearing equity risk; it compensates for time value and uncertainty (Brealey & Myers, 2022).
How does the CAPM option work?
CAPM adds the risk-free rate to beta multiplied by the market risk premium, capturing systematic risk (Sharpe, 1964).
When should I choose DDM?
Use DDM when the firm distributes regular, predictable dividends growing at a constant rate (Gordon, 1962).
Where can I find a company’s beta?
Financial portals such as Yahoo Finance and Bloomberg publish five-year regression betas (Yahoo Finance, 2023).
Why is cost of equity higher than cost of debt?
Equity holders face residual claims and no repayment guarantee, so they demand a premium over bond yields (Damodaran, 2015).
How often should I update inputs?
Update after major rate moves or quarterly earnings; professionals refresh assumptions at least every six months (CFA Institute, 2020).
Can I use the tool for private firms?
Yes—estimate beta from peer companies and infer market values from comparable transactions (KPMG Valuation Guide, 2022).
What if the output is negative?
Negative results indicate erroneous inputs because rational investors never accept negative expected returns (Berk & DeMarzo, 2020).
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