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Cost of Equity Calculator: CAPM and Dividends

Calculate a scenario equity return from risk-free rate, beta and market premium, or from next-year dividends and price. Market inputs are supplied estimates, and the dividend model requires a stable dividend-paying business.

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How the calculation works

Cost of equity is a modelled required return, not a promised investment outcome. This calculator offers CAPM and a constant dividend-growth approach, using the assumptions you supply and showing both side by side when you want to examine why their estimates differ.

CAPM cost of equity = risk-free rate + equity beta × equity market risk premium. Dividend-growth cost of equity = expected next-year dividend / share price + constant dividend growth.

  1. Match the model to the inputs

    CAPM needs a risk-free rate, beta and market premium. Dividend growth needs a forward dividend, scenario price and continuing growth assumption; it is unsuitable for a business without a stable dividend stream.

  2. Calculate the return components

    CAPM adds beta times the premium to the risk-free rate. The dividend approach adds the forward dividend yield to the constant growth rate.

  3. Inspect assumptions behind any gap

    In compare mode, review each model's inputs separately. Different estimates can arise because the models describe risk and expected cash distributions in different ways.

Worked example: CAPM positive beta

Sample inputs demonstrate the method. They are not a forecast or product offer.

The first example uses a 3% risk-free rate, beta of 1.2 and a 5% market premium. The risk component is 6 percentage points, which added to 3% gives a CAPM cost of equity of 9%.

Cost of equity model
CAPM
Risk-free rate (%)
3
Equity beta
1.2
Equity market risk premium (%)
5

Expected result

CAPM cost of equity
9%
Worked example: CAPM negative beta

Sample inputs demonstrate the method. They are not a forecast or product offer.

Cost of equity model
CAPM
Risk-free rate (%)
2
Equity beta
-0.5
Equity market risk premium (%)
6

Expected result

CAPM cost of equity
-1%
Worked example: Dividend-growth model

Sample inputs demonstrate the method. They are not a forecast or product offer.

Cost of equity model
Constant dividend growth
Expected next-year dividend per share
2
Share price used in the scenario
50
Constant annual dividend growth (%)
3

Expected result

Dividend-growth cost of equity
7%
Forward dividend yield
4%

Understanding your result

The output is a scenario equity-return rate. It is not a current quote, an assurance of realised returns or an all-capital discount rate incorporating debt.

Dividend growth assumes a stable continuing payout, so a numerical result does not validate an aggressive perpetual-growth assumption. For valuation, the discount rate must match the cash flows being discounted.

Questions you might have

Should the two models produce the same cost of equity?

Not necessarily. CAPM represents systematic market risk, while dividend growth infers a return from a price and a stable payout projection. A gap is a reason to review assumptions, not to average blindly.

Choosing the right inputs

Cost of equity model
Use CAPM for a market-risk-based scenario or dividend growth for a business represented by a continuing stable payout. Compare mode calculates both but does not average their results.
Equity market risk premium
Enter the equity market risk premium above the risk-free rate, not the full expected market return. Keep its currency and horizon consistent with the risk-free input.
Equity beta
Beta scales the market-risk component rather than the whole return. A negative beta is supported and can reduce the CAPM estimate when the premium is positive.
Expected next-year dividend per share
For the dividend model, enter a positive expected next-year dividend per share, with a positive scenario share price. Adjust a historical dividend yourself before using it as the forward amount.

Common mistakes to avoid

  • Do not enter the expected market return where the premium above the risk-free rate is required.
  • Do not substitute the last dividend for next year's dividend without reviewing the difference.

Assumptions to check

  • Use amounts in one currency and one reporting period. Results are labelled EUR; the arithmetic also works for another consistent currency.
  • Beta, risk premium, share price and dividend projections are supplied estimates. A stable perpetual-dividend model is unsuitable for non-dividend-paying or rapidly changing businesses.
  • A negative beta is permitted and reduces the CAPM risk component for a positive premium.

Sources and method

Read our calculation and testing approach.