What is the typical cost of equity?

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%.

How do you calculate the cost of equity in WACC?

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.

Is CAPM the same as the cost of equity?

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.

What is the difference between the cost of equity and WACC?

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.

Is a high cost of equity good?

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.

What does a company's cost of equity indicate?

The cost of equity represents the return shareholders require for holding an equity investment in that specific business — put simply, the cost of equity means the hurdle rate a stock has to clear, because equity is the return investors demand for taking equity risk. A higher cost of equity indicates that shareholders require more compensation, which lowers what you should pay for the stock today. Analysts use the cost of equity to assess whether expected returns justify the risk, and use cost of equity next to the cost of debt when weighing equity and debt financing.

Cost of equity example

To calculate cost of equity with CAPM — calculate it using CAPM — take a 4.5% risk-free rate of return, a beta of 1.2, and a 9% expected market return: 4.5% + 1.2 × (9% − 4.5%) = 9.9%. That is the company's cost of equity, the required rate of return on the company's equity. Using the capital asset pricing model this way is exactly what this free cost of equity calculator does with live inputs. Don't confuse it with return on equity (ROE): ROE measures delivered accounting profit, while the average cost of equity is what investors demand up front.

Cost of Equity Calculator (CAPM)

The required return on a stock via CAPM, with today's 10-year Treasury yield pre-loaded.

Risk-free rate (Rf)US Treasury 10Y, 2026-08-17

Beta (β)

From any quote page; 1.0 = market average

Equity risk premium (ERP)

Commonly estimated at 4–5.5% for US equities

Cost of equity (CAPM)

9.22%

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: 4.72% + 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.

CAPM vs. the dividend capitalization model

There are two standard ways to calculate the cost of equity. The Capital Asset Pricing Model (CAPM) builds it from the risk-free rate, the stock's beta (its volatility relative to the market), and the expected market return. The CAPM formula: Cost of Equity = Risk-Free Rate + Beta × (Expected Market Return − Risk-Free Rate). The dividend capitalization model works only for companies that pay dividends: Cost of Equity = (Next Year's Dividend per Share ÷ Current Share Price) + Dividend Growth Rate. CAPM is the default in valuation work because it applies to any stock; the dividend capitalization model is a useful cross-check when a company pays a stable, growing dividend. When the market rate of return or the risk-free rate moves, both calculations move with it.

Cost of equity vs. cost of debt

A company funds itself through equity financing, debt financing, or both. The cost of equity is almost always higher than the cost of debt, because shareholders bear more risk than lenders and expect a higher expected return in exchange. Both inputs feed the weighted average cost of capital (WACC), the discount rate used in DCF valuation — so a change in either one changes what the business is worth on paper.

Understanding the cost of equity formula

All the ways to calculate the cost of equity answer the same question: what annual return do equity investors require to hold this stock instead of something safer? In the CAPM version, the equity risk premium — the expected market return minus the risk-free rate — does the heavy lifting: multiply it by beta, add back the risk-free rate, and the cost of equity calculation is done. A higher beta or a wider equity risk premium means a higher required rate. This free calculator keeps the calculation current by pulling today's Treasury yield automatically, so you can use the same inputs an analyst would.

Cost of capital for real companies

The WACC calculator builds on this cost of equity with each company's real filings.

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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.
The cost of equity represents the return shareholders require for holding an equity investment in that specific business — put simply, the cost of equity means the hurdle rate a stock has to clear, because equity is the return investors demand for taking equity risk. A higher cost of equity indicates that shareholders require more compensation, which lowers what you should pay for the stock today. Analysts use the cost of equity to assess whether expected returns justify the risk, and use cost of equity next to the cost of debt when weighing equity and debt financing.
To calculate cost of equity with CAPM — calculate it using CAPM — take a 4.5% risk-free rate of return, a beta of 1.2, and a 9% expected market return: 4.5% + 1.2 × (9% − 4.5%) = 9.9%. That is the company's cost of equity, the required rate of return on the company's equity. Using the capital asset pricing model this way is exactly what this free cost of equity calculator does with live inputs. Don't confuse it with return on equity (ROE): ROE measures delivered accounting profit, while the average cost of equity is what investors demand up front.