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How to Calculate Cost of Equity.
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How to Calculate Cost of Equity.

Rosemary Njeri

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.

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.

Thus, the cost of equity is 3.89%.

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