Cost of Equity
Cost of equity is the return that equity investors require to compensate them for the risk of investing in a company's stock. It is a key component of WACC and therefore directly affects the discount rate used in DCF stock valuation.
Formula
Example
If the risk-free rate is 4.5%, the market premium is 5.5%, and a stock's beta is 1.0, the cost of equity is 10.0%. This represents the minimum annual return an equity investor demands — a threshold directly embedded in stock valuation models.
Why It Matters
Cost of equity is arguably the most important risk input in stock valuation. Because equity is riskier than debt, the cost of equity is always higher, making it the dominant driver of WACC for companies with equity-heavy capital structures.
How MiniValuator Uses Cost of Equity
MiniValuator does not calculate a cost of equity or blend it with a cost of debt into a WACC. Instead of building the discount rate up from these components, the tool applies a single discount rate that defaults to 10% and can be edited directly, and that rate drives the entire DCF. Cost of equity appears here as a core valuation concept, not as a MiniValuator input.
See It in Action
- How the DCF model calculates intrinsic value
- Consumer Cyclical sector intrinsic value analysis
- Industrials sector intrinsic value analysis
Related Terms
- Weighted Average Cost of Capital (WACC) — WACC is the blended rate of return that a company must earn on its invested capital to satisfy all o...
- Capital Asset Pricing Model (CAPM) — CAPM is a financial model that defines the relationship between systematic risk and expected return ...
- Beta (β) — Beta measures the sensitivity of a stock's returns to movements in the overall market. A beta of 1.0...
- Discounted Cash Flow (DCF) — Discounted Cash Flow (DCF) is a fundamental stock valuation methodology that estimates the present v...
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