CAPM Cost of Equity Calculator

Understanding the CAPM cost of equity calculator — concept and principle

The capital asset pricing model (CAPM) estimates the return shareholders require for holding a company's stock: its cost of equity. It is a key input for discounted cash flow (DCF) valuation and the weighted average cost of capital (WACC).

How it is calculated

Cost of equity = Rf + β × MRP

• Risk-free rate (Rf, %): yield on a default-free government bond, usually long-term and in the same currency as the cash flows.
• Beta (β): how strongly the stock moves with the market. β = 1 moves with it, above 1 amplifies swings, below 1 dampens them.
• Market risk premium (MRP, %): expected market return minus Rf.

All rates are annual percentages.

The principle

CAPM, developed by William Sharpe, John Lintner and Jan Mossin in the 1960s, starts from the idea that company-specific risk can be diversified away. Only market-wide (systematic) risk remains, so only it earns a reward. Beta measures how much systematic risk a stock carries, and the MRP is the price per unit of that risk. The stock earns the risk-free rate for waiting plus beta times the market's reward for risk. The model assumes efficient markets and borrowing and lending at the risk-free rate.

Worked example

1. Inputs: Rf = 4.2%, β = 1.15, MRP = 5.5%.
2. Risk premium for this stock: 1.15 × 5.5% = 6.325%.
3. Add the risk-free rate: 4.2% + 6.325% = 10.525%.
4. The calculator shows 10.52% (displayed to two decimals).

How to read the result

A higher cost of equity means future cash flows are discounted more heavily and the valuation falls. Low-beta businesses (utilities, consumer staples) usually show lower figures; cyclical or high-growth firms higher ones. Inputs matter: raising MRP by one point with β = 1.15 adds 1.15 points.

Common mistakes

• Mixing currencies: a euro valuation should use a euro risk-free rate and a matching market premium.
• Using a short-term Treasury bill yield for a long-horizon valuation.
• Entering the expected market return instead of the premium (market return minus Rf).

Frequently asked questions

Where do I find a company's beta?

Financial data services publish betas, usually regressions of 2 to 5 years of returns against an index. Values differ by source, so compare several.

What market risk premium should I use?

Practitioners commonly use a figure somewhere around 4% to 6% for developed markets, but estimates vary by method and date. State the figure and its source in your analysis.

Can the cost of equity be lower than the cost of debt?

It should normally be higher, because shareholders are paid after lenders and carry more risk. A CAPM result below the company's borrowing rate usually signals a questionable input.

Sources: Sharpe, W. F. (1964), Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk, Journal of Finance · Brealey, Myers & Allen, Principles of Corporate Finance (McGraw-Hill)