Cost of Equity Calculator: CAPM Formula and Example

The cost of equity is the return a company’s shareholders expect for investing in its stock, expressed as a percentage. This calculator estimates it with the Capital Asset Pricing Model (CAPM): enter a risk-free rate, the stock’s beta, and the expected market return to get the estimated cost of equity.

Formula

CAPM estimates the cost of equity as:

Cost of equity = risk-free rate + beta × (expected market return − risk-free rate)

• Cost of equity (Ke): the estimated annual return shareholders require, shown as a percentage.
• Risk-free rate (Rf): the annual yield used as a proxy for a return with little or no credit risk, entered as a percentage.
• Beta (β): a measure of how the stock’s returns have moved in relation to the market benchmark. It has no unit.
• Expected market return (Rm): the assumed annual return on the relevant market benchmark, entered as a percentage.

The expression uses percentage-point values consistently. For example, a 4% risk-free rate is entered as 4, not 0.04. CAPM’s market risk premium is Rm − Rf; beta scales that premium to reflect the stock’s measured market sensitivity.

Worked Example

Using the calculator’s default inputs—risk-free rate of 4%, beta of 1.2, and expected market return of 9%:

1. Market risk premium = 9% − 4% = 5%.
2. Beta-adjusted premium = 1.2 × 5% = 6%.
3. Estimated cost of equity = 4% + 6% = 10.00%.

This is an annual model estimate, not a guaranteed return or a promise that the stock will earn 10%.

Assumptions

• Inputs are annual percentage rates expressed in percentage points.
• Beta and the market premium are assumed to be appropriate for the company, benchmark, and valuation date being analysed.
• The calculator applies the basic CAPM equation and does not add adjustments for taxes, fees, company-specific risks, or other financing costs.
• The model assumes investors are compensated for market-related risk in proportion to beta; it does not capture every source of risk or investor expectation.

What Cost of Equity Means

Equity is the ownership capital invested by shareholders. Unlike a loan, it does not usually have a contractual interest payment or a fixed repayment date. The cost of equity is therefore not a bill the company necessarily pays each year. It is an estimated required return: the return investors expect in exchange for bearing the risks of owning the shares.

Companies and analysts use the estimate as a discount rate when assessing expected cash flows to equity, and as one input in a company’s weighted average cost of capital (WACC). WACC combines the costs of debt and equity, with weights related to the capital structure. The cost of equity alone is not the WACC and should not be substituted for it when a model calls for the overall cost of capital.

How to Choose CAPM Inputs

The calculation is straightforward, but the inputs require judgement. Use figures that refer to a consistent period and an appropriate market benchmark. Do not treat the example defaults as current market data or as a recommended assumption.

• Risk-free rate: Analysts commonly use the yield on a government security whose maturity is relevant to the valuation horizon as a proxy. The chosen yield depends on the currency and date of the analysis. Look up a current, suitable figure from a reliable market-data source.
• Beta: Beta can be estimated from historical share and market returns or obtained from a financial-data provider. Results can vary with the benchmark, measurement window, return frequency, and whether the estimate is adjusted. Historical beta is not a promise of future behaviour.
• Market return: This is an expectation, not a directly observable certainty. It may be estimated from historical returns or forward-looking assumptions, but the method and horizon matter. Keep it consistent with the risk-free rate’s currency and time basis.

For a private company, there may be no directly traded share history from which to estimate beta. Analysts may use comparable public companies and adjust their betas, but that process involves additional assumptions beyond this simple calculator.

How to Read and Use the Result

A higher beta increases the CAPM estimate when the expected market return exceeds the risk-free rate, because the model assigns more market risk premium to the stock. If beta is 1, the estimate equals the expected market return under this formula. If beta is 0, the formula returns the risk-free rate. A beta below 0 can occur in some estimates and represents an inverse historical relationship, though this calculator does not accept negative beta.

For example, changing beta from 1.2 to 1.5 while keeping the default rates fixed adds 1.5 percentage points to the result: the premium is 5%, so the beta increase of 0.3 adds 0.3 × 5% = 1.5%. This sensitivity shows why beta and the market premium deserve careful review. It does not establish that the resulting return will occur.

Limitations and Common Misunderstandings

CAPM is a simplifying model. It focuses on market risk measured by beta and does not explicitly account for every business risk, liquidity concern, concentration, or investor preference. Its output can change materially when the benchmark, dates, or assumptions change. A precise-looking percentage should not be mistaken for a precise forecast.

• Confusing cost with an actual payment: Cost of equity is an implied required return, not the interest rate on a loan or necessarily a cash expense.
• Mixing percentages and decimals: Enter 4 for 4%; entering 0.04 would mean 0.04% in this calculator.
• Mixing currencies or horizons: Risk-free and market-return assumptions should be comparable in currency and annual basis.
• Assuming beta is fixed: Beta depends on the data and method used, and can change over time.
• Calling the result the discount rate for every purpose: Equity cash flows and total-firm cash flows use different capital-cost concepts.

Some valuation methods estimate equity cost differently, including dividend-growth approaches when their assumptions and data are suitable. Those methods are not interchangeable without considering what each measures and the quality of its inputs.

Frequently Asked Questions

Is cost of equity the same as cost of debt?
No. Cost of equity is the return shareholders require for taking ownership risk. Cost of debt relates to borrowing and its contractual financing cost. They are separate components in many capital-cost analyses.

Can cost of equity be negative?
A CAPM result could be negative under unusual inputs, such as a sufficiently negative expected market premium combined with a high beta. That would be a model output, not a guaranteed investment return. This calculator’s input limits exclude negative rates and beta.

What does a beta of 1 mean?
In CAPM, beta of 1 makes the estimated cost of equity equal to the expected market return, because the stock’s beta-adjusted market premium is the full market premium.

Why do different sources show different costs of equity?
They may use different risk-free rates, betas, market benchmarks, estimation periods, or expected market returns. Small input differences can change the output, so comparisons require consistent methods and dates.

Is CAPM suitable for a private company?
It can be used as a framework, but a private company lacks a directly traded share price history for its own beta. Estimating beta from comparable companies requires additional analysis and assumptions not included here.

This result is an educational estimate, not financial advice or a forecast of actual returns.

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in rf | Risk-free rate | % | 4 | 0 | 100
in beta | Equity beta | - | 1.2 | 0 | 10
in rm | Expected market return | % | 9 | 0 | 100
out ke | Cost of equity | % | rf + beta * (rm - rf) | 2