Cost of equity: Difference between revisions
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imported>Doug Williamson m (Category added 9/10/13) |
imported>Doug Williamson (Clarify that equity investors enjoy capital gains as well as any dividend income.) |
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(Ke). | (Ke). | ||
The rate of return on a company’s net investments financed by equity which is required to service the providers of the company’s equity capital. | The rate of return on a company’s net investments financed by equity, which is required to service the providers of the company’s equity capital. | ||
For example 10%. | For example 10%. | ||
The cost of equity is often quantified in practice by using either the Capital asset pricing model, or the Dividend growth model. | The cost of equity is often quantified in practice by using either: | ||
:(1) the Capital asset pricing model, or | |||
:(2) the Dividend growth model. | |||
Equity investors expect to enjoy their returns in the form of (1) capital gains, in almost all cases and (2) dividends, if the company is dividend paying. | |||
It is the opportunity cost that is primarily relevant for financial decision making purposes. | |||
Even if the dividend policy were to pay no dividends, the issuing company must still grow the capital value of the shareholders' investment. | |||
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* [[Capital asset pricing model]] | * [[Capital asset pricing model]] | ||
* [[Cost of debt]] | * [[Cost of debt]] | ||
* [[Dividend]] | |||
* [[Dividend growth model]] | * [[Dividend growth model]] | ||
* [[Equity]] | * [[Equity]] | ||
* [[Opportunity cost]] | |||
* [[Weighted average cost of capital]] | * [[Weighted average cost of capital]] | ||
[[Category: | [[Category:Corporate_finance]] | ||
Latest revision as of 12:02, 30 May 2021
(Ke).
The rate of return on a company’s net investments financed by equity, which is required to service the providers of the company’s equity capital.
For example 10%.
The cost of equity is often quantified in practice by using either:
- (1) the Capital asset pricing model, or
- (2) the Dividend growth model.
Equity investors expect to enjoy their returns in the form of (1) capital gains, in almost all cases and (2) dividends, if the company is dividend paying.
It is the opportunity cost that is primarily relevant for financial decision making purposes.
Even if the dividend policy were to pay no dividends, the issuing company must still grow the capital value of the shareholders' investment.
