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Cost of Equity (CAPM) Calculator

Enter the risk-free rate, beta, and expected market return.

How it is calculated

The tool applies the Capital Asset Pricing Model: Re = Rf + β × (Rm − Rf). Rf is the risk-free rate and Rm the expected return of the whole market, both as annual percentages (type 4 for 4%). β is a plain number that scales the market premium. The market risk premium is first computed as Rm − Rf, shown separately, and multiplied by beta, and the result is added to Rf. Everything is displayed to two decimals with a % sign. The tool does not restrict signs, so a negative beta or a market return below the risk-free rate is calculated as entered. Which risk-free rate, beta and market return to use is your choice, and the answer is only as good as those estimates.

Worked example

Suppose the risk-free rate is 4%, the stock's beta is 1.2 and the expected market return is 10%. Market risk premium = 10 − 4 = 6.00%. Beta-adjusted premium = 1.2 × 6.00 = 7.20%. Cost of equity = 4 + 7.20 = 11.20%. Investors would therefore want about 11.2% a year from this stock to compensate for its risk, which is above the 10% market return because its beta is higher than 1.

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Common mistakes

  • Entering the market risk premium in the Rm field. Rm is the total expected market return; if you put 6 there with Rf of 4, the tool sees a 2% premium and gives 6.40% rather than 11.20%.
  • Typing percentages as decimals. Enter 4 for 4%, not 0.04, or the whole result collapses to almost zero.
  • Using a bond yield in a different currency or maturity from the cash flows you are valuing. The risk-free rate should match both.
  • Treating the result as certain. It rests on a historical beta and a guessed market return, so small changes in either move the cost of equity noticeably.
  • Putting the result straight into WACC as an after-tax figure. Cost of equity is not tax-adjusted; only the cost of debt gets a tax shield.

Sources

About this calculator

The Capital Asset Pricing Model (CAPM) estimates the return investors require for holding a company’s stock, using the formula Re = Rf + β × (Rm − Rf), where Rf is the risk-free rate (typically a government bond yield), β measures the stock’s volatility relative to the market, and Rm is the expected overall market return. The term (Rm − Rf) is the market risk premium.

Financial analysts and corporate finance teams use this cost of equity as a key input to the weighted average cost of capital (WACC), which in turn discounts future cash flows in company valuations and investment decisions. It plugs your risk-free rate, beta and expected market return straight into the CAPM formula, cost of equity = risk-free rate + beta × (market return − risk-free rate).

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Comments (1)

  • Editorial team

    A quick sanity check: the result moves by the market premium times any change in beta. With a 6 point gap between market return and risk-free rate, each 0.1 of beta adds 0.60 points, so beta 1.5 instead of 1.2 lifts 11.20% to 13.00%. Run a low and a high beta to see the range before using the figure in a WACC or valuation. Which market return do you use in your own estimates, and where do you take it from?

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