Definition
Cost of Equity (CAPM)
The return investors expect for owning a stock — used to discount future cash.
The cost of equity is the annual return shareholders expect in exchange for the risk of owning a company’s stock. Market Lens estimates it with the Capital Asset Pricing Model (CAPM): the risk-free rate (currently 4.3%) plus the stock’s beta times an equity risk premium (5%). It’s the discount rate in the Market Lens DCF — the yardstick future cash flows must clear to be worth owning today. (A full weighted-average cost of capital, or WACC, would also blend in the cost of debt; Market Lens discounts at the cost of equity for simplicity.)
Related terms
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