Cost of equity

Cost of equity is the rate of return shareholders require to compensate for the risk of holding a business's equity. It is the discount rate applied to equity cash flows — net income, FCFE, dividends, owner earnings — in any per-share valuation model. We compute Ke via the Capital Asset Pricing Model: risk-free rate plus beta times the equity risk premium. Each input requires judgment. The risk-free rate is typically the ten-year Treasury yield, refreshed quarterly; the equity risk premium is sourced from Damodaran's implied-ERP series (currently in the 4.5–5.5% range for U.S. equities); beta is computed from regression against the market, and we use both raw beta (for the strict scenario) and an adjusted beta blending raw, sector, and Bloomberg-adjusted (for the moderate scenario). The result is two cost-of-equity estimates per company, typically 50–150 basis points apart, which we use as the strict and moderate discount rates in our forward-earnings models. The strict number is the conservative valuation case; the moderate number is the central case. Importantly, we discount EPS-based models at Ke, not at WACC — using WACC on equity cash flows double-counts the tax shield and the leverage adjustment.