How do I calculate the cost of capital report?
In order to calculate the cost of capital for a project or investment, it is important to understand the concept of the cost of equity. The cost of equity is the return that a company requires for an investment or project and it is used as a capital budgeting threshold. To calculate the cost of equity, the Capital Asset Pricing Model (CAPM) can be used, which takes dividends per share for the next year and the current market value of the stock. The formula for the CAPM cost of equity is
Ke = Rf + β(Rm - Rf), where Ke is the cost of equity, Rf is the risk-free rate of return, β is the beta of the security, and Rm is the expected market return. Sourcetable has useful financial functions to help calculate the cost of equity.