Cost of equity | Business & Finance homework help
The cost of equity can be calculated using two different approaches: the dividend yield plus growth rate approach, and the Security Market Line (SML) model. For the dividend yield plus growth rate approach, you would need to calculate the company’s expected dividend per share for next year, then divide it by the current market price of the stock. You would then add this figure to an estimated growth rate for dividends over time in order to arrive at the cost of equity.
To calculate it using SML model, you must first determine a target beta for your organization based on comparable publicly traded companies; then multiply that by the risk free return in addition to adding in a risk premium which is determined from empirical data about public companies. The sum of these three figures is your organization’s cost of equity.
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