Cost of equity (CAPM): How we calculate
Estimate the required equity return using the market-risk model (CAPM).
How we calculate
Market-risk model for the cost of equity (CAPM): cost of equity = risk-free rate + beta × market risk premium. You enter every assumption; beta is not assigned automatically to a private company.
What the figures mean
- Required return on equity (CAPM)
The model adds a risk-free rate to a market-risk premium adjusted by β. It calculates a required return, not a promised investment gain.
Simple example: Risk-free rate 3%, market return 8%, β = 1.2: 3 + 1.2 × (8 − 3) = 9%.
- Market-risk coefficient (β)
Scales the market-risk part of the required return in the model. It does not predict an exact share-price movement.
Simple example: A 5 percentage-point market premium with β = 1.2 becomes a 6-point premium.
Worked example
These illustrative inputs let you check the method. They are not figures for a real company or automatically current tax rates.
Inputs
- Risk-free rate (%)
- 3
- Beta
- 1.2
- Market risk premium (%)
- 5
Results
- Cost of equity
- 9
- Market risk component
- 6
Change assumptions in the calculator and compare outcomes. Money follows your input unit; figures from different periods need adjustment before comparison.