Cost of Equity Calculator

What Cost of Equity Means

Cost of equity is the return the owners of a company expect for putting money at risk instead of buying a Treasury bond. A 10-year Treasury paid 4.99% on October 27, 2026 with essentially no default risk, so shareholders demand a premium on top for the chance of losses. The safe rate plus that premium is the cost of equity.

Two groups use the number. Business owners use it as the hurdle a project must clear before it deserves capital: a project returning 6% when equity costs 9% destroys value even if the accountants report a profit. Investors use it as a fair-return benchmark: buying a stock that can only compound at 5% when comparable risk pays 9% is a bad trade at the market price.

Cost of equity is not a bill anyone sends you. It is an opportunity cost that moves with Treasury yields, market prices, and the risk profile of the business, which is why every input below carries a date and a source.

The CAPM Formula, Piece by Piece

The standard model is the Capital Asset Pricing Model, CAPM for short:

Cost of equity = Risk-free rate + Beta x (Expected market return - Risk-free rate)

Three moving parts. The risk-free rate is the yield on long US government debt, normally the 10-year Treasury. The expected market return is what a broad equity index is priced to deliver. The gap between the two is the equity risk premium, the extra return the whole stock market must offer to pull money out of bonds.

Beta scales that premium to the specific stock. A beta of 1.1 means the share historically moved about 10% more than the index in the same direction, so it earns 10% more than the market premium. A sleepy utility at a beta of 0.6 earns 60% of it.

Practitioners often add a fourth term for small companies:

Cost of equity = Risk-free rate + Beta x ERP + Size premium

The size premium is a flat add-on that compensates for the higher failure rate of small firms. The calculator has a box for it; leave it at 0 for large caps.

Worked Example A: A Mid-Sized Stock at October 2026 Rates

Take a consumer brand with a beta of 1.1, measured the standard way: five years of monthly returns regressed against the S&P 500. The inputs are dated so the math can be reproduced later:

Risk-free rate: 4.99%. The 10-year constant maturity yield published by the US Treasury daily par yield curve for October 27, 2026.

Equity risk premium: 3.70%. NYU Stern professor Damodaran's implied equity risk premium (October 2026) for the S&P 500, which he publishes at the start of every month. His expected return on equities was 8.99% against a then 5.29% 10-year yield; pair his premium with whichever risk-free rate is current.

Now the arithmetic, one step at a time. First the premium the beta earns: 1.1 x 3.70 = 4.07. Then the base: 4.99 + 4.07 = 9.06. The cost of equity is 9.06%.

Read it as a sentence: the owners of this business expect to make 9.06% a year, before taxes and after nothing, for holding a share that moves slightly harder than the market. Any project, acquisition, or reinvestment inside the company should clear that bar. If management reinvests at 7%, the gap of 9.06 - 7 = 2.06 points is value destroyed every year, compounding.

Worked Example B: A Small-Cap With a Size Premium

Now a regional manufacturer worth $400 million. Its shares move with the market but a bit less, so five years of monthly returns give a beta of 0.9. Small firms fail more often than large ones across market history, so valuation practice adds a size premium. Published size-decile research is the source for the number; for this example assume 1.50 points, a level you would defend with the specific size-decile table you cite.

The beta term first: 0.9 x 3.70 = 3.33. Stack the three pieces: 4.99 + 3.33 + 1.50 = 9.82. The cost of equity is 9.82%.

Compare the two examples. The small company has the lower beta (0.9 against 1.1), yet a higher hurdle, because the size premium more than covers the difference. Without the premium its required return would be 4.99 + 3.33 = 8.32%, and the premium adds 1.50 points to reach 9.82%.

Two cautions. Betas on thinly traded small caps are noisy, so many analysts average the betas of a handful of public comparables instead of trusting one regression. And a size premium is an assumption, not a law: if you cannot point to the dataset behind your number, run the calculation both ways and see whether the investment decision changes.

Where Each Input Comes From

Every input in the calculator has a public source, which is what keeps the output defensible in a memo or a negotiation. The table lists where each number came from for the examples above.

Date-stamp everything. The 10-year yield fell from 5.31% on October 5, 2026 to 4.99% by October 27, a move of 0.32 points in three weeks, which alone shifts the Example A answer from 9.38% to 9.06%. An undated cost of equity is not reproducible, and a number nobody can reproduce is an opinion.

Beta deserves one more note. Screeners compute it differently (some use 2 years of weekly returns, some 5 years monthly), so the same stock can show 1.05 on one site and 1.18 on another. Pick one convention, write down which one you used, and stay with it across every company you compare.

How the Answer Moves With Beta

Beta is the input users argue about, so it helps to see the whole range at once. Holding the risk-free rate at 4.99% and the premium at 3.70%, each beta implies its own cost of equity. The beta term comes first in each row:

The spread is wide. Moving from a beta of 0.8 to 2.0 adds 12.39 - 7.95 = 4.44 points to the hurdle, which flips a lot of marginal projects from acceptable to rejected. That is the point: CAPM turns a fuzzy argument about risk into one number you can put next to a forecast.

A Dividend Cross-Check on the Same Stock

CAPM prices risk from the outside in. A second model, the dividend growth model, prices the same stock from its own cash payouts: the required return is next year's dividend divided by the price, plus the growth rate of the dividend.

Cost of equity = (Dividend per share x (1 + growth)) / Price + growth

Example A's company pays $1.84 per share annually, trades at $46.00, and has grown the dividend about 3% a year. Next year's payout: 1.84 x 1.03 = 1.8952, about $1.90, and you keep the unrounded figure in the math. The dividend yield on the current price: 1.8952 / 46 = 0.0412, or 4.12%. Add growth: 0.0412 + 0.03 = 0.0712, so the model says 7.12%.

The two models disagree: 9.06% against 7.12%, a gap of 9.06 - 7.12 = 1.94 points. That is normal and useful. The dividend model only sees payout and growth, so it misses risk the market is pricing; CAPM sees risk but not the company's specific cash flows. Many analysts split the difference and work from the average: (9.06 + 7.12) / 2 = 8.09, or 8.09%.

If the two models are more than a couple of points apart, one of your inputs is probably wrong: a stale beta, a growth rate copied from a boom year, or a price quote from a different week. Reconcile before you use either number.

How Cost of Equity Feeds WACC

Companies rarely run on equity alone, and the blended cost of all capital is the weighted average cost of capital, WACC. Cost of equity is its most expensive ingredient. Debt is cheaper for two reasons: lenders rank ahead of shareholders in a bankruptcy, and interest is deductible at the 21% federal corporate rate while dividends are not.

A quick illustration with Example A's company, financed 60% equity and 40% debt. The after-tax cost of the 4.99% loan: 4.99 x (1 - 0.21) = 3.94. Weight each cost and add: 9.06 x 0.60 = 5.44 and 3.94 x 0.40 = 1.58, so 5.44 + 1.58 = 7.02, a WACC of about 7.02%.

Notice the order of magnitude: equity is the expensive slice even at only 60% of the capital structure. That is why analysts who plug the cost of debt in where the cost of equity belongs understate hurdles by two or three points and approve projects they should reject.

This page stops at the relationship. WACC needs market-value weights, the company's actual rate on each debt issue, and a decision on how to treat leases and pensions, which is a calculator of its own. The number to carry from here is the equity cost: 9.06% for the mid-cap, 9.82% for the small-cap, both on October 2026 inputs.