What is Cost of Equity ?
The cost of equity excluding flotation costs refers to the rate of return that shareholders expect to earn on their investment in a company's stock, without considering the expenses associated with issuing new equity securities. This metric is essential for companies and investors as it provides a clear picture of the return expected by shareholders based solely on the risk associated with holding equity in the company. It is calculated using various models such as the Capital Asset Pricing Model (CAPM) or the Dividend Discount Model (DDM), taking into account factors like the risk-free rate, market risk premium, and beta. Accurate estimation of the cost of equity excluding flotation costs is crucial for companies to evaluate their cost of capital, determine appropriate investment projects, and make strategic financial decisions.
How to Calculate Cost of Equity?
Cost of Equity calculator uses Cost of Equity = ((Dividend in Next Period/Current Share Price)+(Dividend Growth Rate*0.01))*100 to calculate the Cost of Equity, The Cost of Equity formula is the rate of return expected by shareholders without factoring in expenses from issuing new equity securities. Cost of Equity is denoted by K symbol.
How to calculate Cost of Equity using this online calculator? To use this online calculator for Cost of Equity, enter Dividend in Next Period (D_{1}), Current Share Price (CP) & Dividend Growth Rate (g) and hit the calculate button. Here is how the Cost of Equity calculation can be explained with given input values -> 10.05556 = ((1.5/2700)+(10*0.01))*100.