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What is Cost of Equity (COE)? What is the process to calculate it? Why it is important?
Cost of equity is the sum total of return expected by the shareholders along with the risk free rate. It is calculated by using the following formula:
Ce= Rf+ Bs(Rm-Rf)
where Ce= Cost of equity
Rf= Risk free rate of return ie. the interest rate of government bonds prevailing in the country
Bs= Beta of the particular stock ie.The volatility of the stock to stock market indices movements
Rm= Return of the stock market indices (Avg for atleast3 years)
This can also be calculated by Capetial Asset Pricing Model and by Weighted Average Cost of Capital methods.
Cost of equity is the significant factor which the investors look at before and after investing
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