1. What is the Cost Of Internal Equity?

The Cost Of Internal Equity represents the return rate that a company must offer to its equity investors to compensate for the risk they undertake by investing in the company. It is a crucial component in capital budgeting and financial decision-making processes.

2. How Does the Calculator Work?

The calculator uses the Cost Of Internal Equity formula:

Where:

• \( EPS \) — Earnings Per Share in dollars ($)
• \( Price \) — Current market price per share in dollars ($)
• \( g \) — Expected growth rate of dividends in percentage (%)

Explanation: The formula calculates the cost of equity by combining the dividend yield (EPS/Price) with the expected growth rate of dividends.

3. Importance of Cost Of Internal Equity Calculation

Details: Accurate calculation of cost of internal equity is essential for determining the company's weighted average cost of capital (WACC), making investment decisions, and evaluating financial performance.

4. Using the Calculator

Tips: Enter EPS in dollars, current market price in dollars, and expected growth rate in percentage. All values must be valid (EPS > 0, Price > 0, g ≥ 0).

5. Frequently Asked Questions (FAQ)

Q1: Why is cost of internal equity important?
A: It helps companies determine the minimum return they need to generate to satisfy their equity investors and make informed financial decisions.

Q2: What are typical values for cost of equity?
A: Cost of equity typically ranges between 8-15% for most companies, though it can vary based on industry, market conditions, and company-specific risk factors.

Q3: How does growth rate affect cost of equity?
A: Higher growth rates generally lead to higher cost of equity, as investors expect higher returns from companies with greater growth potential.

Q4: Are there limitations to this calculation method?
A: This method assumes constant growth rate and may not accurately capture companies with irregular dividend patterns or those that don't pay dividends.

Q5: How often should cost of equity be recalculated?
A: It should be reviewed regularly, especially when there are significant changes in market conditions, company performance, or growth expectations.