Cost of Common Equity Calculator

Formula

The formula to calculate the Cost of Common Equity (Ke) is:

\[ Ke = \frac{D1}{P0} + g \]

Where:

$ Ke $ is the cost of common equity (%)
$ D1 $ is the expected annual dividends per share ($)
$ P0 $ is the current market price per share ($)
$ g $ is the growth rate of dividends (decimal)

What is the Cost of Common Equity?

The cost of common equity refers to the return rate that a company must provide to its common equity investors to maintain their interest and investment in the business. It is essentially the compensation the investor expects for taking on the risk associated with investing in the company’s equity. This cost is a significant component of a company’s capital structure and is often used in financial analysis and decision-making.

Example Calculation

Let's assume the following values:

Expected Annual Dividends per Share (D1) = $2
Current Market Price per Share (P0) = $40
Growth Rate of Dividends (g) = 0.05 (5%)

Using the formula to calculate the Cost of Common Equity:

\[ Ke = \frac{2}{40} + 0.05 = 0.05 + 0.05 = 0.10 \text{ or } 10\% \]

The Cost of Common Equity (Ke) is 10%.