Cost of equity
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...
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
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
MoneyWeek is written by a team of experienced and award-winning journalists, plus expert columnists. As well as daily digital news and features, MoneyWeek also publishes a weekly magazine, covering investing and personal finance. From share tips, pensions, gold to practical investment tips - we provide a round-up to help you make money and keep it.
-
HMRC confirms crypto ETN ISA rules
With crypto ETNs now technically available for UK retail investors, HMRC has confirmed they can be held in an ISA – but there’s a complication
-
Pensioners targeted in fine wine scams – the tactics to watch for
Wine has emerged as the latest lure in investment fraud, with pensioners being specifically targeted by scammers