Glossary
Cost of equity
The return shareholders expect for owning a company's shares, given their risk.
The cost of equity is most often estimated with the capital asset pricing model (CAPM): the risk-free rate, plus the stock's beta times the equity risk premium.
Shareholders are paid last, after lenders, so the cost of equity is higher than the cost of debt. It is an input to WACC and the discount rate for valuing a company's equity directly.
Beta is measured from past prices and moves over time, so different sources give different answers for the same company.
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Related terms
- WACC (weighted average cost of capital): The average return a company's lenders and shareholders expect, weighted by how much of each it uses.