1. What is Cost of Equity?

The cost of equity represents the return a company must offer investors to compensate for the risk of investing in its stock. It's a key component in determining a company's cost of capital and valuation.

2. How Does the Calculator Work?

The calculator uses the dividend capitalization model formula:

Where:

• Dividends — Annual dividends per share ($)
• Price — Current stock price ($)
• Growth Rate — Expected annual dividend growth rate (%)

Explanation: The formula combines the dividend yield with the expected growth rate of dividends to estimate the total return required by equity investors.

3. Importance of Cost of Equity

Details: Cost of equity is crucial for capital budgeting decisions, company valuation, and determining the weighted average cost of capital (WACC). It helps investors assess investment opportunities and companies evaluate projects.

4. Using the Calculator

Tips: Enter dividends per share in dollars, current stock price in dollars, and expected dividend growth rate as a percentage. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's a typical cost of equity range?
A: Most companies have cost of equity between 8-15%, though it varies by industry, company risk, and market conditions.

Q2: What are limitations of this model?
A: Only works for dividend-paying stocks. For non-dividend stocks, CAPM (Capital Asset Pricing Model) may be more appropriate.

Q3: How to estimate growth rate?
A: Use historical dividend growth, analyst forecasts, or sustainable growth rate (ROE × retention ratio).

Q4: Does this account for risk?
A: Indirectly - higher risk companies typically need to offer higher dividend yields or growth prospects.

Q5: How often should cost of equity be recalculated?
A: Regularly, especially when stock prices, dividends, or growth expectations change significantly.