Cost of Equity Calculator
Using CAPM, compute the cost of equity (the return shareholders require) from the risk-free rate, beta and market return.
Input Data
Results
At a glance:Cost of equity = the minimum return shareholders require, via CAPM: Re = risk-free rate + beta x (market return - risk-free rate). The bracket term is the market risk premium; beta (β) measures stock volatility vs the market — higher beta means higher required return. It is the discount rate for DDM/DCF valuation and the equity component of WACC. WARNING: CAPM is theoretical; beta and market premium are estimates (beta varies by period/frequency). HK risk-free often = HKD Exchange Fund notes or US Treasuries. Treat as a range, run sensitivity. Education, not advice.
Formula
Re = Rf + β × (Rm − Rf).
$$R_e = R_f + \beta \times (R_m - R_f)$$How to Use
- Enter the risk-free rate (e.g. government bond yield).
- Enter the stock's beta.
- Enter the market return to see the cost of equity.
FAQ
What is beta and how do I get it?
Beta measures a stock's price sensitivity to the overall market. β=1 moves with the market; >1 is more volatile; <1 is steadier. It is derived by regressing the stock's historical returns against a market index; finance sites and broker reports provide it. Note different sources differ by sample period (2 vs 5 years) and frequency (daily/weekly/monthly).
What rates should I use in Hong Kong?
Risk-free rate: a government bond yield matching the horizon — often HK Exchange Fund notes or US Treasuries (HKD pegged to USD). Market return / premium: historical Hang Seng average minus risk-free, or risk-free plus a 5%-8% premium (a debated estimate). Because inputs are subjective, test several values and watch sensitivity.
What is the cost of equity used for?
It is the shareholders' required return: the discount rate for dividend/discounted-cash-flow valuation, the equity part of WACC, and the hurdle for value-creation metrics. If ROE or ROIC persistently falls below it, the company is not meeting shareholders' requirements.
What are the limits of CAPM, and alternatives?
CAPM assumes an efficient market, homogeneous expectations, unlimited risk-free borrowing and that only systematic risk (beta) is priced — unrealistic. It also struggles with the small-cap/value premia and depends on hard-to-estimate beta and premium. Alternatives: the Gordon growth model (Re = dividend/price + growth) for stable dividend payers, multi-factor models (Fama-French), or bond-yield-plus-risk-premium. Use CAPM as the base and cross-check with others.
How should I pick risk-free, market return and beta in HK?
Risk-free (Rf): the current market yield of a medium/long government bond (e.g. 10Y), not a historical average. Market return (Rm) / premium (Rm-Rf): the premium is the hardest and most contested input — use historical HSI average minus Rf, or a forward estimate (dividend yield + earnings growth); 5%-7% is common for mature markets. Beta (β): take the regression beta vs the Hang Seng Index from data platforms, mindful that 2-year vs 5-year and daily vs monthly samples differ; unlisted or recent IPOs use unlevered peer betas. Since all three are estimates, treat the result as a range and run sensitivity.
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References
Content review: Calculatorism Finance Team. Results are for reference only; please refer to the relevant authorities for the official figures.