A company's cost of equity is the annual rate of return that an investor expects from a firm in exchange for bearing the risk of owning its shares. The expected return is calculated by adding the dividend yield (the dividend per share divided by current market price of the stock) to any growth rate dividends.
Using a very simple example, we can calculate it as follows. Say you require a rate of return of 10% on an investment in ACME Inc. The stock is currently trading at £10 a share, which means you will want a £1 return on your investment. However, because it pays a dividend of 40p a year, the share price will have to rise 60p in order for you to get that desired return. This 10% return is your cost of equity.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
-
What is the 25x retirement rule and does it work?The 25x retirement rule has been around for decades but many experts question if it is a suitable strategy
-
When is the self-assessment tax return deadline?If you are self-employed, rent out a property or earn income from savings or investments, you may need to complete a self-assessment tax return. We run through the deadlines you need to know about
