Cost of Equity Calculator — CAPM
The CAPM formula, Re = Rf + β × (Rm − Rf), tells you what return equity investors demand for holding a stock, given its sensitivity to market risk (beta). Enter the risk-free rate, beta and expected market return to get the cost of equity and see where the stock sits on the Security Market Line.
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Minimum return equity investors require — used as the discount rate for equity cash flows
- 1
Equity risk premium (ERP)
10% − 4.5% = 5.5% - 2
Beta × ERP
1.2 × 5.5% = 6.6%The extra return required above the risk-free rate, scaled by the stock's sensitivity to the market. - 3
Cost of equity (Re)
4.5% + 6.6% = 11.10%
How does this calculator work?
CAPM: Re = Rf + β × (Rm − Rf). The cost of equity is the risk-free rate plus beta times the equity risk premium. A stock with β = 1.2, Rf = 4.5% and a 5.5% ERP has a cost of equity of 4.5% + 1.2 × 5.5% = 11.1%. This rate is used to discount equity cash flows and as the Re input in the WACC formula.
Formula
How this is calculated
The Capital Asset Pricing Model (CAPM), developed by Sharpe, Lintner and Mossin in the 1960s, describes the expected return of an asset as the sum of two components: the risk-free rate (what you earn with no risk at all, approximated by a government-bond yield) and a risk premium proportional to how much the asset moves with the overall market. That proportionality constant is beta (β): a β of 1.0 means the stock tracks the market; β > 1 means it amplifies market swings; β < 1 means it dampens them.
The equity risk premium (ERP = Rm − Rf) is the extra annual return investors have historically demanded above the risk-free rate for owning the market as a whole. Long-run estimates for developed markets typically cluster around 4–6% (as of 2024; these are editable estimates). The model combines them: Re = Rf + β × ERP.
The Security Market Line in the chart below shows this linear relationship — every correctly priced asset should sit on the line. In practice, CAPM is a simplification: it assumes a single-factor world where only market risk is priced; real markets also price size, value, profitability and other factors (Fama-French models). CAPM remains a widely used baseline for WACC calculation and capital-budgeting discount rates.
Frequently asked questions
A beta of 1.0 means the stock moves in line with the market. Beta > 1 (e.g. 1.5) means the stock is more volatile — if the market rises 10% you expect roughly 15% — and commands a higher return. Beta < 1 (e.g. 0.6) implies a defensive stock that moves less than the market and therefore has a lower required return.
Financial data providers such as Bloomberg, Yahoo Finance, Refinitiv and Morningstar publish betas, typically estimated by regressing the stock's weekly or monthly returns against a market index over 2–5 years. Betas are backward-looking and can change, so use them as an estimate rather than a precise figure.
No. The Dividend Discount Model (DDM) gives Re = D₁/P₀ + g for dividend-paying firms. Multi-factor models (Fama-French 3- or 5-factor) add size and value risk premia. For private companies without a quoted beta, practitioners often use industry betas and adjust for the firm's own leverage. CAPM is the most widely taught and used starting point.
TG we-Calculate Editorial Team. (2026). Cost of Equity Calculator — CAPM [Online calculator]. TG we-Calculate. https://we-calculate.com/calculator/cost-of-equity-calculator
TG we-Calculate Editorial Team. "Cost of Equity Calculator — CAPM." TG we-Calculate. 2026. https://we-calculate.com/calculator/cost-of-equity-calculator.
TG we-Calculate Editorial Team, "Cost of Equity Calculator — CAPM," TG we-Calculate, 2026. [Online]. Available: https://we-calculate.com/calculator/cost-of-equity-calculator
@misc{wecalculate_cost_of_equity_calculator, title = {Cost of Equity Calculator — CAPM}, author = {{TG we-Calculate Editorial Team}}, howpublished = {\url{https://we-calculate.com/calculator/cost-of-equity-calculator}}, year = {2026}, note = {TG we-Calculate} }
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