CAPM & Cost of Equity Calculator
Calculate a company’s Cost of Equity using the Capital Asset Pricing Model (CAPM). Account for risk-free treasury yields, systematic beta factors, and market risk premiums.
Mega-Cap Tech Stock
Defensive Utility
Small-Cap Growth
Calculate Cost of Equity
Reset
Run Engine Unit Tests
Cost of Equity (Ke)
—
—
Enter parameters on the left to calculate Cost of Equity.
Market Risk Premium:
—
Equity Risk Premium (Beta × MRP):
—
Beta Risk Classification:
—
Risk Premium Allocation
Copy Results Text
Share Configuration
Understanding CAPM & Cost of Equity
The Capital Asset Pricing Model (CAPM) defines the relationship between systematic risk and expected return for assets, particularly stocks. Financial analysts use CAPM to determine the Cost of Equity, which acts as the equity discount rate in corporate valuation models (like WACC or DCF).
The CAPM Formula
Cost of Equity (Ke) = Rf + β × (Rm – Rf) + Size Premium
Where:
- Rf (Risk-Free Rate): The yield on risk-free investments, typically 10-year government bonds.
- β (Beta): Volatility coefficient relative to the market index benchmark (S&P 500).
- Rm – Rf (Market Risk Premium – MRP): The extra return demanded by investors to hold stocks instead of risk-free bonds.
- Size Premium: Optional adjustments added to cost models to capture risk premium offsets of smaller companies.