Cost of Equity Capital Calculation Methods

Market determined standard Comparable earnings standard

Market determined standard

Earnings-price ratio
Cost of equity capital is equal to the ratio of current earnings per share to the market price per share

Discounted cash flow model (DCF)

Formula is (d/p) + g
d is current dividend per share p is current market price per share g is expected rate of growth in dividends per share

Market determined standard (cont.)

Capital Asset Model (CAPM)
Formula is Rf + (Rm Rf)
Rf is risk free return RM is expected return on a stock market portfolio is the beta coefficient (companys relevant market risk)

Comparable earnings standard

Based on the idea of opportunity cost
capital should not be committed to any venture unless it can earn a return commensurate with that prospectively available in alternative employments of similar risk.testimony regarding Tampa Electric Co by S. F. Sherwin. Examine earnings on common equity for enterprises with similar risk, or with different risk with allowance for risk differences