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Wize University Introduction to Finance Textbook > Cost of Capital

Cost of Equity

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Cost of Equity

  • The rate of return that a company pays out to equity investors.
  • The required rate of return on the corporation's shares.
  • For common equity, this is found using CAPM and beta.
  • For preferred equity, this is based on the market price of the shares and the dividends paid out.

Cost of Common Equity

Cost of Preferred Equity

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Example: Cost of Common Equity

What is the cost of common equity for ABC Inc's stock assuming the following information:
  • The stock's beta is 1.5
  • Treasury bills are yielding 2%
  • The expected return of the market is 10%
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Example: Cost of Preferred Equity

ABC Inc. has preferred shares with a book value of $100. The shares are currently trading at 98.5% and have a dividend rate of 8%. What is the cost of preferred equity?

Practice: Cost of Common Equity

XYZ Corporation has ten million outstanding common shares with a book value of $18 per share. The beta on these shares is 1.89. The risk-free rate and market expected return are 3% and 12% respectively. What is the cost of common equity?

Round your final answer to 2 decimal places and enter a percentage.

Practice: Cost of Preferred Equity

Orange Corporation has 600,000 preferred shares outstanding. The total book value of the preferred shares is $42 million and the company pays a 9% dividend. What is the cost of preferred equity if the preferred shares are currently trading at 105% of book value?

Round your final answer to 2 decimal places and enter in percentage.