Real Estate Analyst Question:
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How to calculate the cost of equity?
Answer:
Cost of equity is the return a firm theoretically pays to its equity investors. Capital Asset Pricing Model (CAPM) is the most commonly used method of determining the appropriate cost of equity. According to CAPM:
Cost of Equity, Re = Rf + b (Rm-Rf), where;
Re = Cost of Equity
Rf = Risk-free rate of return
Rm = The historical return of the stock market / equity market
b = is a number describing the correlated volatility of an asset in relation to the volatility of the benchmark that said asset is being compared to.
Cost of Equity, Re = Rf + b (Rm-Rf), where;
Re = Cost of Equity
Rf = Risk-free rate of return
Rm = The historical return of the stock market / equity market
b = is a number describing the correlated volatility of an asset in relation to the volatility of the benchmark that said asset is being compared to.
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