To calculate the Cost of Common Equity (Ke), divide the expected dividend by the current stock price and add the growth rate of dividends. This formula helps estimate the return required by shareholders.
The Cost of Common Equity Calculator is a financial tool used to estimate the return that shareholders expect from their investment in a company. This calculation is crucial for businesses aiming to evaluate their financing costs and determine the equity portion of their capital structure.
The cost of equity represents the compensation the market demands in exchange for owning the asset and bearing its associated risks. It’s necessary for calculating the Weighted Average Cost of Capital (WACC), comparing the cost of debt versus equity, and making informed financial decisions.
Formula
The formula for Cost of Common Equity (Ke) is:
| Variable | Description |
|---|---|
| Cost of Common Equity | |
| Expected Dividend per Share | |
| Current Stock Price | |
| Dividend Growth Rate |
Solved Calculations
Example 1:
If the expected dividend per share is $2, the current stock price is $40, and the dividend growth rate is 5%, calculate the cost of common equity.
| Step | Calculation |
|---|---|
| 1. | |
| 2. | |
| 3. |
Answer: 10%
Example 2:
For a stock with an expected dividend of $3 per share, a current stock price of $50, and a growth rate of 6%:
| Step | Calculation |
|---|---|
| 1. | |
| 2. | |
| 3. |
Answer: 12%
What is a Cost Of Common Equity Calculator?
The Cost of Common Equity Calculator is a unique tool that is usually used by investors and financial analysts. It functions to calculate the return required on a company’s common stock. This measure, known as the cost of equity, is essential in assessing a company’s overall cost of capital and is crucial for making informed investment decisions.
In addition to that, this calculator uses methods like the Dividend Growth Model or CAPM (Capital Asset Pricing Model) to estimate the cost of equity, factoring in elements like dividend growth, market risk, and return rates.
Chiefly, in corporate finance, understanding the cost of common equity is vital for calculating the Weighted Average Cost of Capital (WACC), which helps evaluate investment risks and returns. This tool also assists companies in balancing their funding sources, whether through equity or debt, by providing a clearer picture of financial obligations and growth potential.
Final Words:
Lastly, the Cost of Common Equity Calculator is an invaluable asset for those analyzing capital costs, enabling both investors and companies to assess financial strategies effectively.
