Cost of Equity Calculator (CAPM)
The required return on a stock via CAPM, with today's 10-year Treasury yield pre-loaded.
From any quote page; 1.0 = market average
Commonly estimated at 4–5.5% for US equities
Cost of equity (CAPM)
9.11%
That's the typical range for a market-average stock at today's rates, and a sensible hurdle for equity cash flows.
- Formula
- Re = Rf + β × ERP
- Reading
- 4.61% + 1.00 × 4.50%
How to estimate a stock's cost of equity
- The current 10-year Treasury yield is already loaded as the risk-free rate.
- Set beta: 1.0 for a market-average stock, below 1 for defensives, above 1 for cyclicals. Any quote page lists it.
- Keep the equity risk premium at 4–5.5% unless you have a strong view.
- Read the result as a hurdle: this stock must be priced to return at least this much to be worth holding.
- Use it as the discount rate for equity cash flows, or as the Re input in our WACC calculator.
The Treasury yield refreshes daily from the US Treasury's published curve.
How this was calculated
Re = Rf + β × ERP
Rf is the risk-free rate; we use the 10-year US Treasury par yield, refreshed daily from the US Treasury's published curve. β (beta) measures how much the stock moves relative to the market; providers typically estimate it by regressing five years of monthly returns against the S&P 500. ERP is the equity risk premium, the extra return investors demand for holding stocks over government bonds, commonly estimated at 4–5.5% for US equities. The result is the discount rate for equity cash flows and the Re term inside WACC. These are educational estimates, not investment advice.
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Frequently asked questions
The most common method is CAPM: Re = Rf + β × ERP, where Rf is the risk-free rate (10-year Treasury yield), β measures the stock's sensitivity to the market, and ERP is the equity risk premium, the extra return investors demand for holding stocks over government bonds. This calculator pre-loads the current 10-year Treasury yield and lets you set beta and ERP.
With a risk-free rate around 4% and an equity risk premium near 4.5%, a market-average stock (β = 1) has a cost of equity of roughly 8.5%. Defensive stocks (β ≈ 0.7) land closer to 7%, and high-beta names (β ≈ 1.5) above 10.5%.
The cost of equity is the 'Re' term in WACC. Compute it with CAPM first, then weight it by the equity share of the capital structure: WACC = (E/V) × Re + (D/V) × Rd × (1 − Tc). Our WACC calculator does both steps together for any ticker.
Not exactly. CAPM is one model for estimating the cost of equity, and by far the most widely used. Alternatives include the dividend discount approach (dividend yield plus growth) and build-up methods that add size or country risk premiums. Different models produce different estimates; the concept they estimate is the same.
The cost of equity is what shareholders alone require; WACC blends it with the after-tax cost of debt, weighted by the company's capital structure. Because debt is usually cheaper than equity and interest is tax-deductible, WACC is typically lower than the cost of equity for any company carrying debt.
No. It means shareholders perceive more risk and demand more return, which makes equity financing expensive and lowers what a DCF says the business is worth today. For an investor, though, a stock priced to deliver returns above its cost of equity is exactly what you are looking for.
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