The cost of equity for investors is the rate of return required on an investment in equity. For the company, the cost of equity determines the required rate of return on a particular project or investment.
Formula based on CAPM model:
Cost of Equity = Risk-Free Rate + Beta x (Market Rate of Return - Risk-Free Rate)
Formula based on the dividend capitalization model:
Cost of Equity = (DPS ÷ CMV) + GRD
where:
DPS = dividends per share, for next year
CMV = current market value of stock
GRD = growth rate of dividends