What is CAPM Cost of Equity Calculator and How Do You Calculate It?
Cost of Equity (%) = Risk-Free Rate + Beta * Market Risk PremiumThis standardized equation forms the quantitative foundation used by chartered financial analysts (CFA), investment bankers, and corporate treasurers under GAAP and IFRS reporting frameworks.
Formula Components & Operational Definitions
RfYield 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%).
Step-by-Step Real-World 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%.
Strategic Takeaway: Higher beta stocks require higher expected equity returns to compensate investors for market volatility.
Industry Benchmark Comparison Table
CAPM is the foundational model for calculating cost of equity in financial valuation.
Stock moves in tandem with the index.
Executive Sector Note: Defensive stocks (FMCG, Utilities) have Beta < 1.0; cyclical and high-growth tech stocks have Beta > 1.2.
Analytical Comparison & Critical 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.