Key takeaways
- The formula: cost of equity = risk-free rate + beta × equity risk premium (CAPM). With a 4.5% risk-free rate, a beta of 1.2 and a 5% premium, it comes to 10.5%.
- Market inputs now: the 10-year US Treasury yielded 4.98% on 29 October 2026. Kroll recommends a 5.0% US equity risk premium; Aswath Damodaran's implied premium was 4.20% on 1 October 2026.
- Benchmarks: the average US company had a cost of equity of 8.02% in January 2026, by Damodaran's industry data. Utilities sat at 5.02%, semiconductor makers at 10.72%.
- Dividend payers: the dividend growth model, Ke = D1 / P0 + g, suits steady dividend payers. A $2.50 dividend on a $45 share growing 4% a year gives 9.6%.
- Private companies: take a listed comparable's beta, unlever it, re-lever it at the deal's debt and decide on a size premium. Our buyout example lands at 15.5%.
- Where it is used: cost of equity is the equity part of WACC in a DCF, and the return a buyout's equity has to beat.
Cost of equity calculator
CAPM: Ke = Rf + β × (Rm − Rf). With a 4.5% risk-free rate, a beta of 1.2 and a 9.5% expected market return: Ke = 4.5% + 1.2 × 5.0% = 10.5%.
Dividend growth model: Ke = D1 / P0 + g. With a $2.50 dividend next year, a $45 share price and 4.0% growth: Ke = 5.6% + 4.0% = 9.6%.
Private company: unlever a public comparable's beta, βu = βl / (1 + (1 − t) × D/E), re-lever it at the target's debt, βl = βu × (1 + (1 − t) × D/E), then add a size premium.
Sources for the inputs: the Treasury yield is from FRED. Kroll's premium is from its January 2026 cost of capital update. The implied premium is from Damodaran's home page, and the industry figures are from his cost of capital by sector table.
What is the cost of equity: the return shareholders require
Cost of equity (Ke): the yearly return investors need to hold a company's shares, given its risk. It is what they give up by not putting the money into something equally risky.
Why it has to be estimated: equity has no interest rate and no repayment schedule, so no contract states it. Analysts estimate it with a model, most often CAPM.
Where it is used: it is the equity part of WACC, the discount rate in most DCF valuations, and the bar for the equity in a leveraged buyout.
In private equity: it works like a hurdle. If a deal's projected equity return stays below it, the deal does not pay for its risk. Model that return with the IRR calculator.
Cost of equity formula: CAPM
Ke = Rf + β × (Rm − Rf)
The formula starts from a return with almost no risk and adds a premium for owning shares, scaled by how risky this company's shares are.
| Input | What it is | Where to get it | Now |
|---|---|---|---|
| Risk-free rate (Rf) | Return on a government bond with almost no default risk | The 10-year US Treasury yield; Kroll pairs its premium with the 20-year yield | 4.98%, 29 October 2026 |
| Beta (β) | How much the stock moves with the market. At 1.0 it moves in line; at 1.2 it moves about 20% more | A regression on market returns, or an industry average | 0.91 for the US market, 1.28 for software |
| Equity risk premium (Rm − Rf) | The extra return investors want for owning shares rather than bonds | Kroll's recommendation or Damodaran's implied premium | 5.0% (Kroll), 4.20% (Damodaran) |
| Expected market return (Rm) | The risk-free rate plus the premium | Rf + equity risk premium | About 10% with the figures above |
Worked example: a risk-free rate of 4.5%, a beta of 1.2 and an expected market return of 9.5% give a 5% premium. Ke = 4.5% + 1.2 × 5% = 10.5%.
What it means: equity investors need about 10.5% a year to hold the stock. A valuation or deal model that implies less does not pay for the risk.
CAPM is a method: it is one way to estimate the cost of equity, and the most common one. It works for private companies too, with a beta borrowed from listed comparables.
Cost of equity by industry: from 5% for utilities to 10.7% for chip makers
Why they differ: the cost of equity follows beta. Semiconductor makers carry a beta of 1.52 and utilities 0.24, so investors ask far more of chip stocks.
How to use the table: it is a sanity check. A software company valued at a 6% cost of equity, or a utility at 12%, needs a reason.
Listed companies only: these are averages for listed US companies. Private and leveraged companies usually need more, as the private-company section below shows.
Dividend growth model formula
Ke = D1 / P0 + g
D1: the dividend per share expected next year.
P0: the share price today.
g: the steady yearly growth rate of the dividend.
What it measures: the dividend yield plus the growth investors expect, which together give the return they require.
Worked example: a $2.50 dividend next year, a $45 share price and 4% growth. Ke = 2.50 / 45 + 4% = 5.6% + 4% = 9.6%.
A utility: a share at $60 paying $3.00, with dividends growing 3% a year. Ke = 3.00 / 60 + 3% = 5% + 3% = 8%.
When it fits: mature companies with steady dividends, such as utilities and consumer staples. For venture-backed and buyout companies, which rarely pay dividends, CAPM is the standard.
Levered and unlevered beta: cost of equity for a private company
The problem: CAPM needs a beta, and beta comes from share prices. A private company has no share price, so its beta cannot be measured.
The fix: take the beta of a listed comparable, remove the effect of its debt, then add back the debt the target will carry.
Unlevered beta formula: βu = βl / (1 + (1 − t) × D/E)
Levered beta formula: βl = βu × (1 + (1 − t) × D/E)
Here t is the tax rate and D/E the debt-to-equity ratio. In a buyout the target's debt after the deal is usually far higher than the comparable's, so the re-levered beta rises.
| Step | Calculation | Result |
|---|---|---|
| 1. Comparable's beta | Listed industrial company: beta 1.1, debt-to-equity 0.4, tax rate 25% | βl = 1.1 |
| 2. Unlever it | 1.1 / (1 + 0.75 × 0.4) | βu = 0.846 |
| 3. Re-lever at the deal's debt | 60% debt, 40% equity, so D/E = 1.5: 0.846 × (1 + 0.75 × 1.5) | βl = 1.80 |
| 4. CAPM | 4.5% + 1.80 × 5% | 13.5% |
| 5. Size premium | 13.5% + 2% (illustrative) | 15.5% |
Size premium: many valuers add a few points for small, illiquid companies. Damodaran argues the historical small-cap premium has faded since the early 1980s and does not use one, so state it separately and justify it.
Why buyouts need more: leverage, size and illiquidity all push the required return up. The same business costs more equity inside a leveraged deal than as a listed company.
Cost of equity vs WACC vs cost of debt
| Cost of equity | Cost of debt | WACC | |
|---|---|---|---|
| Whose return | Shareholders | Lenders | Everyone who funds the company |
| How it is set | Estimated with CAPM or the dividend growth model | The interest rate on the loans, after the tax saving on interest | A weighted average of the two |
| Formula | Ke = Rf + β × (Rm − Rf) | Kd × (1 − t) | WACC = E/V × Ke + D/V × Kd × (1 − t) |
| Repaid | Last, and only if value is left | First, on a schedule | Not applicable: a blend of both |
| Used to discount | Cash flow to equity holders | Not used on its own | Free cash flow to the firm in a DCF |
In the WACC formula: E is the value of equity, D the value of debt, V their sum and t the tax rate.
Why equity costs more: lenders are repaid before shareholders, so shareholders carry more risk and ask for a higher return.
Why buyouts use debt: replacing expensive equity with cheaper debt lowers WACC and lifts equity returns. It also raises the cost of equity, because the re-levered beta goes up.
Other debt: mezzanine debt sits between the bank loan and the equity in price and risk. Lenders who fund buyouts are in our guide to private credit funds and firms.
Cost of equity examples
| Case | Inputs | Cost of equity |
|---|---|---|
| Listed mid-cap technology company (CAPM) | Rf 4.5%, beta 1.4, premium 5% | 4.5% + 1.4 × 5% = 11.5% |
| Private industrial company in a buyout (CAPM, re-levered beta) | Rf 4.5%, comparable beta 1.1 re-levered to 1.80, premium 5%, size premium 2% | 13.5% + 2% = 15.5% |
| Mature utility (dividend growth model) | $3.00 dividend, $60 share price, 3% growth | 5% + 3% = 8% |
Check them: each case runs in the calculator at the top of the page. Switch on the private-company panel for the second one.
How private equity uses the cost of equity
As a hurdle: a deal team compares the equity IRR its model projects with the cost of equity. If the IRR is lower, the risk is not paid for.
Next to the fund hurdle: funds also promise their investors a preferred return, explained in our post on the hurdle rate in private equity.
In the deal process: cost of capital sits in the valuation and investment committee stages of the PE and VC investment process.
Who does it: the buyers that run these models are in our list of top private equity firms.
Data and methodology
Formulas: CAPM, the dividend growth model and the unlevered and re-levered beta formulas are standard corporate finance formulas. The calculator runs them in your browser and keeps nothing.
Market inputs: the risk-free rate, the equity risk premium and the size premium come from the sources linked in the text (FRED, Kroll, Damodaran), as of October 2026. Check them again before you use the result.
Worked examples: illustrative companies with round numbers, not Private Equity List data.
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