Thông tin chi tiết về Cost of Equity Summary and Forum
is Cost of Equity? Description
Cost of Equity is a financial term that is used to
indicate the minimum annual Rate of Return a firm must offer to its
ordinary shareholders for waiting for their
returns and for bearing
risk. The risk consists of both the market risk and the
company-specific risk. Therefore it will vary from company to
The cost of equity reflects the opportunity cost of investing for the
shareholders. The compensation that the shareholders receive
typically consists of:
Capital gains (through increases
in the share price)
Note that the returns are expected future returns, not historical returns. Therefore they can be
expressed as the anticipated dividends on the shares in each
year in perpetuity. The cost of equity is then the current market
price of the share plus the discounted value of all future
dividends in perpetuity.
The Cost of Equity is just one of the components
of the (total) Cost of Capital for any company.
Another main source of financing is Debt (using company bonds), for
which the Cost of Debt can be calculated. See also WACC.
The Cost of Equity can be calculated by dividing
the Dividends per Share for Next
Year by the Current Market Value of
the Stock, and then adding the Growth Rate of the Dividends (see figure). Another
way to calculate it, is by taking a Risk-free Return (the return of
a government bond) and adding to that the company’s Beta (as
published frequently by certain investment services companies)
times the difference of an Average Stock Return (for example the
average return of all stocks in the Dow Jones) minus the Risk-free
Return (see figure).
Usage of Cost of Equity. Example
Suppose an investor requires a rate of return of
9% on an investment in ABC Bank, because of the bank’s risk
profile. The stock is currently trading for € 100 and is expected
to pay a dividend of € 3. For each share, the investor will want a
€ 9 return in total, which is composed of the € 3 of the dividend
plus a € 6 increase in share price. The Cost of Equity for ABC Bank
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Introduction and Calculation of WACC and its
Initial Understanding and Calculation of WACC and Cost of Capital,
Trainings, WorkshopsThis superb explanation establishes a solid
initial understanding of: – Cost of Capital – Cost of Equity – Cost
Corporate Valuation for Businesses
Corporate Valuation, Book Value, Market Value, Intrinsic Value,
Fundamental Value, M&A, VBM, Fundamental InvestingPresentation
that elaborates on corporate valuation, including the following
sections: 1. Three types of value: – Book…
Cost of Equity Diagram
Shareholder CompensationDownload and edit this 12manage PowerPoint
graphic for limited personal, educational and business use.
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