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