Valuation

Cost of Equity

By May 27, 2019September 21st, 20215 Comments

What is Cost of Equity?

Cost of Equity is the rate of return that investors require to invest in the company’s common stocks.

  • Eddie Wu 1 year ago

    I realized that different companies can achieve the same annualized return in a given period with different beta. Cost of Equity is rate that investor requires to invest in one company. Because the beta is different now, so the cost of equity would be different t0o; however, the annualized return in past for two companies is essentially the same, and the cost of equity should be the same too?

    I don’t know if my question makes sense to you, please correct me if I have a misunderstanding on this concept.

    • Lumovest 1 year ago

      Hi Eddie,

      Cost of Equity is the rate of return that investors are targeting in order to invest their money in a stock. However, the actual return from the stock could be very different. Just because two stocks managed to achieve the same return in the past does not mean investors are targeting the same return for both stocks.

      • Eddie Wu 1 year ago

        I am so sorry and I am still a bit confused. For example, both company A and company B have achieved a 100% return in the past five years. Company A has a beta of 0.5, and company B has a beta of 1.5. Then the WACC would be so much different assuming other variables are the same. By using DCF, the intrinsic value of company A is higher than company B’s because of the lower WACC.

        As an investor, I would go for company A for sure because of the higher intrinsic value, calculated by the DCF.; However, I think both companies A and B should be treated as equally as attractive in reality.

        • Lumovest 1 year ago

          So what’s the question?

        • Eddie Wu 1 year ago

          Why would investors are willing to accept higher cost of equity just because of the smaller beta, assuming the small beta company and the big beta company can yield both the same returns in the future.

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