Cost of equity

What it means

The return equity holders require for bearing the residual risk of the business.

The exam angle

Usually estimated with CAPM, sometimes with a dividend discount rearrangement or a build-up model for private firms. All three are estimates, and they rarely agree.

Where it appears in the syllabus

• Corporate FinanceCFA Level I · exam weight 6–9% · Governance, working capital, capital allocation, capital structure.
• EquitiesCFA Level I · exam weight 11–14% · Market organisation, indexes, industry analysis, dividend models.

Related terms

• Weighted average cost of capitalThe blended required return on a company’s capital, weighting each source by its share of the total at market value.
• Agency problemThe conflict that arises when managers act in their own interest rather than that of the owners who employ them.
• Business riskThe uncertainty in operating income arising from the nature of the business itself, before any financing decision.
• Capital budgetingThe process of deciding which long-term investments a company should make.
• Capital structureThe mix of debt and equity a company uses to fund itself.
• Cash conversion cycleThe time between paying for inventory and collecting cash from the customer.