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.
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.
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.
MiniValuator calculates cost of equity using CAPM and blends it with the after-tax cost of debt to arrive at WACC. The resulting discount rate is what drives the entire DCF stock valuation.
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