Cost of equity
Principles of Finance glossary · Cost of Capital & Capital Structure
Definition
The expected return investors require to hold a firm's common equity. Most commonly estimated via CAPM as r_e = r_f + β_e · (r_m - r_f), or for high-risk firms via a build-up that adds country and size premia. The equity-component input to WACC.
Cost of equity in plain English
Shareholders take a bigger risk than lenders — they get paid last and can lose everything — so they expect a bigger return to make owning the stock worthwhile. Cost of equity is exactly that: the yearly return investors demand for holding a company's shares, and to the company it's the "price" of raising money by selling ownership. The usual estimate starts with a safe baseline return (like government bonds), then adds a risk bonus scaled to how wildly the stock swings versus the overall market: r_e = r_f + β_e · (r_m - r_f). It's like the interest rate a business must effectively "earn" for its owners to justify their bet — riskier companies have to promise more.
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