Shareholders' expectation on the annual return rate on its equity in the Business:
K_E = \frac{\rm Return}{\rm E} |
where
\rm Return | annual cash return , whether as dividends or as capital growth |
\rm E |
The most popular model of estimating the Cost of Equity is Capital Asset Pricing Model (CAPM):
where
R_f
R_p risk premium
R_p = R_m - R_f, where
R_m is historical average return of the stock market
\beta
K_E = R_f + \beta \cdot R_p
risk-free bond (like for example U.S. Treasury Bond) sensitivity to the market risk for the security
See also
Business / Business Administration / Financial Management / Financial Accounting
[ Capital Asset Pricing Model (CAPM) ]