Cost of Equity Calculator (CAPM & Gordon Growth Model
Cost of Equity ($K_e$) is the minimum rate of return a company must earn to compensate equity investors for taking on the risk of holding its stock.
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📐 Formula
💡 Practical Example
CAPM Model: 4.2% Risk-Free Rate, 1.2 Beta, 5.5% Market Risk Premium: Cost of Equity Ke = 4.2% + 1.2 × 5.5% = 4.2% + 6.6% = 10.80%.
📖 About Cost of Equity Calculator (CAPM & Gordon Growth Model
Cost of Equity (K_e) is the minimum rate of return a company must earn to compensate equity investors for taking on the risk of holding its stock.
To use the Cost of Equity Calculator (CAPM & Gordon Growth Model), enter your Calculation Valuation Model, Risk-Free Rate (10-Yr Treasury Yield), Stock Beta Coefficient (β) and other values. The calculator instantly computes Cost of Equity (Ke), Applied Valuation Model and more. Results update in real time as you change any input — no submit button needed.
How to Use This Calculator
Enter your Calculation Valuation Model — choose from CAPM (Capital Asset Pricing Model), Gordon Constant Dividend Growth Model, Risk-Free Rate (10-Yr Treasury Yield) (e.g. 4.2 in %), Stock Beta Coefficient (β) (e.g. 1.2), Market Equity Risk Premium (ERP) (e.g. 5.5 in %), Next Year Expected Dividend (D1) (e.g. 2.50 in ), Current Stock Price (P0) (e.g. 50.00 in ), and Constant Dividend Growth Rate (g) (e.g. 4.0 in %). Results update instantly as you type — adjust any value to compare scenarios.
The Formula
CAPM Formula: Cost of Equity (Ke) = Risk-Free Rate + Beta × (Market Return - Risk-Free Rate)
Gordon Growth Formula: Cost of Equity (Ke) = (Next Year Dividend D1 ÷ Stock Price P0) + Growth Rate g
Worked Example
CAPM Model: 4.2% Risk-Free Rate, 1.2 Beta, 5.5% Market Risk Premium:
Cost of Equity Ke = 4.2% + 1.2 × 5.5% = 4.2% + 6.6% = 10.80%.
Understanding Your Result
For financial decisions, validate your result against your specific tax situation, current interest rate environment, and applicable regulations — these change frequently and vary by jurisdiction. A calculated estimate is a useful starting point; for decisions involving significant capital (more than one month's income), consult a certified financial planner (CFP) or CPA. Financial projections beyond 3–5 years carry increasing uncertainty — model a conservative, base, and optimistic scenario to understand the range of outcomes.
💡 Mathematical Rigor & Applied Context
- This calculator applies exact mathematical definitions following conventions established by NIST and international standards bodies.
- Rounding errors accumulate across multi-step calculations. For precision-critical work, maintain extra significant figures through all intermediate steps.
- Many mathematical concepts have multiple valid formulations — if a result seems unexpected, verify which convention or definition applies to your context.
- Dimensional analysis (unit tracking) is the fastest way to catch formula errors. Every term in an equation must have consistent, compatible units.
- Numerical methods used in digital calculators introduce floating-point precision limits (~15 significant digits for IEEE 754 double precision).
- For statistical and probabilistic calculations, always specify whether you are working with population parameters or sample statistics — formulas differ.
- Visualizing a problem geometrically or testing with known boundary values (zero, infinity, negative) reveals hidden errors faster than algebraic checking.
- When in doubt, validate your result against a simplified hand calculation or a published worked example from a textbook or standards document.
Results are for informational and educational purposes only. Always verify critical decisions with a qualified professional.