Module II· Cost of Equity & CAPMBasic
Question
What is the cost of equity, and why do you need it?
Answer
Definition
The return required by equity investors — their opportunity cost for comparable risk.
Why you need it
- Discount rate for equity cash flows (LFCF approach)
- Component of WACC (UFCF approach)
Standard calculation
CAPM.
Typical range
- Mature industrials: 8–11%
- Growth / restructuring companies: 12–15%+
Intuition
Higher business risk → higher CoE → lower equity value.