CAPM Calculator — Cost of Equity

What Is CAPM?

The Capital Asset Pricing Model (CAPM) is the most widely used framework for estimating the cost of equity — the return a company must offer investors to compensate them for bearing the systematic risk of holding that stock. The formula is straightforward: Ke = Rf + β × (Rm − Rf), where Rf is the risk-free rate, β (beta) is the stock's market sensitivity, and Rm is the expected market return. The difference Rm − Rf is the market risk premium: the extra return investors demand for owning equities instead of Treasury bonds.

CAPM is useful because it links risk directly to expected return through a single, observable variable — beta. A stock with a beta of 1.5 gets a 50% larger equity risk premium than the market; a stock with a beta of 0.5 gets half as much. The model was developed by William Sharpe (1964) and John Lintner (1965), and Sharpe won the Nobel Prize in Economics in 1990 partly for this work. Despite its limitations, CAPM remains the default cost-of-equity estimator in corporate finance, taught in every MBA program and used in most professional DCF models.

How to Use Cost of Equity in a DCF

The cost of equity is the equity component of WACC (Weighted Average Cost of Capital). WACC blends the cost of equity with the after-tax cost of debt, weighted by each source's share of the capital structure. Use the WACC calculator to combine them. The resulting WACC is then used as the discount rate in a DCF valuation — a higher cost of equity (from a higher beta) drives a higher WACC and a lower intrinsic value per share, all else equal.

For equity-only analyses (common for small or debt-light companies), the CAPM cost of equity is sometimes used directly as the discount rate, bypassing WACC. This is valid when debt is minimal or when you want a conservative, equity-investor perspective. Either way, the cost of equity from CAPM is the foundational input — getting it right matters more than the DCF arithmetic that follows.

CAPM Inputs Explained

Risk-Free Rate (Rf): Use the current 10-year US Treasury yield. It represents the theoretical return available with no default risk. As of 2024–2025, this has ranged from 4.0% to 5.0%, so 4.5% is a reasonable neutral starting point. Do not use money-market rates or overnight rates — they do not match the long-duration risk of equity investing.

Beta (β): Beta measures how much the stock has historically moved relative to the S&P 500. A beta of 1.0 means the stock tracks the market; 1.5 amplifies moves by 50%; 0.5 dampens them. This calculator can look up live beta from Yahoo Finance — or enter it manually. For a deep dive on how beta is computed from regression of weekly returns, use the Beta Calculator.

Expected Market Return (Rm): The long-run nominal return of the S&P 500 is approximately 10% (7–8% real). This is the standard assumption in academic and practitioner CAPM applications. When markets are expensive by historical valuation measures, some analysts shade this down to 7–9% to reflect lower forward-looking returns.