CAPM Cost of Equity Calculator
The Capital Asset Pricing Model (CAPM) estimates the expected rate of return demanded by equity investors for bearing systematic market risk (Beta).
Sensitivity Analysis
Evaluate how variations in key operational drivers impact Cost of Equity (Ke %).
| Sensitivity Case | Assumption Shift | Driver Value | Cost of Equity (Ke %) | Impact vs Base |
|---|
Formula & Methodology
Cost of Equity (%) = Risk-Free Rate + Beta * Market Risk PremiumRfYield on 10-year government sovereign bond.
Beta (β)Volatility of stock relative to the broader market index.
ERP (%)Expected excess return of stock market over risk-free bonds (typically 5%–7%).
Practical Worked Example
Calculate the cost of equity for a stock with Beta = 1.15, 10-year G-Sec yield = 7.0%, and Market Risk Premium = 6.0%.
Interpretation & Industry Benchmarks
CAPM is the foundational model for calculating cost of equity in financial valuation.
Stock moves in tandem with the index.
Industry Nuance: Defensive stocks (FMCG, Utilities) have Beta < 1.0; cyclical and high-growth tech stocks have Beta > 1.2.
Analytical Limitations
- Assumes historical beta accurately reflects future systematic market risk.
Frequently Asked Questions
What is Beta in CAPM?
Beta measures a stock’s sensitivity to broader market index swings.