Corporate FinanceFinancial Glossary
Cost of Equity
Definition
The return that equity investors require for investing in a company, representing the opportunity cost of holding that company's stock instead of a risk-free asset. Commonly estimated using the Capital Asset Pricing Model (CAPM): Cost of Equity = Risk-Free Rate + Beta x Equity Risk Premium.
Why It Matters
Cost of equity is a key input in WACC calculations and DCF valuations. In India, using a risk-free rate of 7% (10-year government bond yield), an equity risk premium of 6-7%, and a beta of 1.0, the cost of equity for an average Indian company is roughly 13-14%. Companies must earn above this threshold to create shareholder value.