How to Calculate Cost of Equity using CAPM

This video shows how to calculate a company's cost of equity by using the Capital Asset Pricing Model (CAPM).

You can calculate the cost of equity for a company by using the following formula:

Cost of Equity = Risk-free Rate + Beta * (Expected Market Return - Risk-free Rate)

For example, let's say the risk-free rate is 2% and the expected market return is 10%. If a company's beta is 2.5, its cost of equity would be 22%. This cost of equity is the required rate of return that investors would expect to receive based on the company's systematic risk. If the systematic risk were higher (for example, a company with a beta of 3.0), then the cost of equity would be higher (26%) because investors would expect a higher return to compensate for bearing a higher level of systematic risk.—
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[Moraleslife]

Thank you for your videos. Your videos have helped me pass FAR (CPA).

[damionfisher]

Your videos are amazing, lots of simplicity and clarity. Thank You

[ivornworrell]

*Thank you very much for your financial videos Sir, this is advanced and very useful financial knowledge for business students like myself.*

[mathiseight]

The way you explain theories is amazing. Thank you !

[joh]

luv your videos. helped me tons -from Korea

[ralphgaoseb]

Rf, Bi - those available publicly. The Rm is however not clear, where does one get this number?

[Aaron-whjp]

That comment about finding the market index of the S&P 500 saved me, thank you so much. God is real

[ExploreLearnEnglishWithGeorge]

I assigned for a Business management course to learn how to run a business...unfortunately this is part of the curriculum and 'me no happy'...I really can't stand this abstract non-sense. Well explained tho, thanks for the vid...by the time we got to Price to Earnings ratio I have already forgotten what is 'Cost of Equity' derived from, and this video was a convenient reminder. Cheers

[sushilpokharel]

how to find the value of beta when one company acquire another company?

[orianateyorbeard]

This helped with a homework problem of mine! thank you!!-Oreo

[treyjasso]

thank you for this video! I needed this one.

[SoulessZombieHD]

Thank you Sir, that really helped me pass my midterm.

[vusasivedlamini]

Good day, what if im not given the Market rate. How do i complete the formula

[Youssef-vhdh]

do we use levered or unlevered beta????

[Nick_]

The question is, how do you calculate beta, or from where do you get it?

[amenagh]

But what if you do not have the risk free rate. I'm trying to figure out how to get the risk free rate to use.

[richardsalley]

The only thing you left out here is was what the "risk free rate" is.
According to Investopedia, if the stock is paying an annual dividend of 3%, that is the risk free rate being used - (the dividend percent rate).
Or should it be the current rate paid on a treasury bond?

[kayedal-haddad]

Where do you get the risk free rate of return from?

[ivornevin]

How was the figure obtained for expected return for market portfolio obtained?

[austinsvlog]

using a finance calculator this would all be rounded. the 11.6 would be a 12 because the 9.6 would round automatically to a 10