A firm’s cost of equity represents the compensation the market demands in exchange for owning the asset and bearing the risk of ownership.
A firm uses cost of equity to assess the relative attractiveness of investments, including both internal projects and external acquisition opportunities.
Formula to calculate cost of equity.
Example:
Company A had its dividends per share at $ 7, its market price per share was $ 9 and the growth rate of its dividends in that year was 2%. Determine its measure of cost of equity.
Thus, the cost of equity is 3.89%.
