Cost of Equity

Equity management software, sometimes referred to as cap table management software is used by companies to administer equity or its assets minus its liabilities. The complex processes of issuing equity and its potential cost is tracked and managed by these tools.

Investors should know the cost of equity to ensure their investments are worthwhile and beneficial. Investors may look for their investments to increase by the cost of equity at a minimum in terms of stock valuation.

The dividend capitalization model or the dividend discount model and the capital asset pricing model (CAPM) are  two ways to calculate the cost of equity. The calculations for the same investment may differ as different variables are used by these two calculations. However, the risk of an investment can be evaluated by both models.

Cost of equity = (D1 / P0) + g in the dividend capitalization model where, D1 is the yearly dividends per share or the total number of dividends that one share earns in one year, P0 is the current price of one share and g is the dividend growth rate.

Expected return on investment = Rf + βi (E(Rm) - Rf) in the capital asset pricing model (CAPM), where Rf, otherwise known as the risk-free rate is the interest rate of an investment with zero risk, βi  is the beta risk or volatility of the investment compared to the wider market and (E(Rm) - Rf) refers to the overall risk of investing in the stock market.