Cost of Equity

Measured as

CAPM (common) = risk-free rate + beta * equity risk premium

Misused when

• Using a single-point estimate without sensitivity analysis.
• Mixing short-term market moves into long-term discount assumptions without context.

Operator takeaway

• Often estimated using CAPM as a starting point, then adjusted with judgment for company-specific risk.
• Higher risk implies higher cost of equity and lower present value in a DCF.
• Tie Cost of Equity to the same balance-sheet date, scenario, and decision memo you are using elsewhere in the model.
• Document which claims, costs, or adjustments your team includes before comparing numbers across forecasts, covenants, or valuation work.

Next decision

• Quantify the impact with WACC Calculator if you need to turn the definition into an operating assumption.
• Read WACC explained: how to estimate a discount rate for DCF if the decision depends on interpretation, policy, or trade-offs beyond the raw formula.