Cost of Equity Calculator
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The Cost of Equity Calculator helps you determine the required rate of return for equity investors using next year’s projected dividends, the current market value of the stock, and the growth rate of dividends. By entering these values, you can easily calculate the cost of equity, which is crucial for financial planning and investment decisions.
Formula
The formula used is:
\[ \text{Cost of Equity (COE)} = \left(\frac{\text{FDPS}}{\text{CMV}}\right) + \text{GRD} \]
Where:
- FDPS: Next Year’s Dividends per Share
- CMV: Current Market Value of the Stock
- GRD: Growth Rate of Dividends
How to Calculate the Cost of Equity:
- Find the Current Stock Value: Look up the stock’s current market price.
- Estimate Next Year’s Dividends: Predict the dividends per share for the next year.
- Determine the Dividend Growth Rate: Calculate the expected annual growth rate of the dividends.
- Calculate the Cost of Equity: Plug these values into the formula above.
Understanding the cost of equity helps companies determine the return needed to attract and keep investors, informing key decisions regarding new projects and investments.