Cost of Equity

Cost of equity is the return shareholders require for holding a company's stock, and the rate a valuation uses to discount the cash flow that belongs to them. A company pays no stated rate on its shares, so unlike the cost of debt it has to be estimated.

The usual estimate is the capital asset pricing model: risk-free rate + beta x equity risk premium. Each input is a choice, from which Treasury maturity counts as risk-free to the window the beta is measured over and the premium assumed, so two careful analysts can land a point or two apart.

In a full build it is the equity leg of WACC, weighted by equity's share of the capital structure. In the shortcut our fair-value tool uses, free cash flow divided straight by shares, the discount rate you set stands in for the cost of equity.