A firm’s cost of equity represents the compensation the market demands in exchange for owning the asset and bearing the risk of ownership.
A firm uses cost of equity to assess the relative attractiveness of investments, including both internal projects and external acquisition opportunities.
Formula to calculate cost of equity.
![Calculate Cost of Equity.](https://www.learntocalculate.com/wp-content/uploads/2020/06/Cost-of-Equity-1024x140.png)
Example:
Company A had its dividends per share at $ 7, its market price per share was $ 9 and the growth rate of its dividends in that year was 2%. Determine its measure of cost of equity.
![Calculate Cost of Equity.](https://www.learntocalculate.com/wp-content/uploads/2020/06/Cost-of-Equity-2-1024x285.png)
Thus, the cost of equity is 3.89%.