Cost of Equity
Short definition
The cost of equity is the return shareholders require for systematic risk. It is not an accounting cost; FCFE and dividends are discounted at this rate, not FCFF.
Detailed explanation
CAPM is the skeleton. Country risk sits in Rf (local bond) or as CRP in Ke — both together can double-count. Levered beta carries capital structure into Ke; at a target structure beta is relevered.
In Turkey the currency of Rf and ERP locks the currency of Ke. Do not mix a TL Ke with USD cash.
Why it matters for the CFO
The ROIC > WACC test is incomplete without Ke. Dividends and buybacks at ROE below Ke destroy value.
How it is calculated
Ke = Rf + β × ERP (+ CRP / büyüklük / spesifik prim; tek sayım)
Variables in the formula
- Ke: Cost of equity
- Rf: Risk-free rate
- β: Equity beta (levered)
- ERP: Equity risk premium
How to read it
Ke is Rf plus beta×ERP. More leverage lifts Ke; “cheap debt” makes equity dearer.
Numerical example
Rf 18%, β 1.10, ERP 5%, CRP 0 (Rf already local) → Ke = 18 + 1.10×5 = 23.5%.
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Definitions are educational. They are not investment, credit or tax advice.