Discuss two methods that may be used to estimate the cost of equity.

1. Dividend Discount Model: This model is based on the notion that a stock’s price can be estimated by discounting its expected future dividends at an appropriate rate. A company’s dividend policy and projected growth of dividends are used to calculate the cost of equity for the firm.

2. Capital Asset Pricing Model (CAPM): This model uses beta values from similar stocks in order to estimate a company’s cost of equity. The CAPM equation takes into account risk levels associated with different investments and allows investors to compare potential returns on their investments before making decisions about where to allocate capital.