Cost of equity
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(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.
