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Cost Of Internal Equity Formula:
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The Cost Of Internal Equity (r_e) represents the return required by a company's shareholders for investing their capital in the company. It is calculated using the dividend growth model formula that considers expected dividends, current stock price, and growth rate.
The calculator uses the Cost Of Internal Equity formula:
Where:
Explanation: The formula calculates the required rate of return by dividing expected dividends by current price and adding the expected growth rate.
Details: Calculating the cost of internal equity is crucial for capital budgeting decisions, determining the company's weighted average cost of capital (WACC), and making informed investment and financing decisions.
Tips: Enter expected dividend in dollars, current stock price in dollars, and expected growth rate as a percentage. All values must be valid (positive numbers).
Q1: What is the difference between internal and external equity?
A: Internal equity refers to retained earnings used for financing, while external equity involves raising capital by issuing new shares to investors.
Q2: Why is the growth rate important in this calculation?
A: The growth rate reflects the expected increase in future dividends, which significantly impacts the required return for shareholders.
Q3: What are typical values for cost of equity?
A: Cost of equity typically ranges from 8% to 15% for most companies, though it can vary based on industry, company risk, and market conditions.
Q4: Are there limitations to this calculation method?
A: This method assumes constant dividend growth and may not be suitable for companies that don't pay dividends or have unstable dividend patterns.
Q5: How does cost of equity affect company valuation?
A: Higher cost of equity increases the discount rate used in valuation models, which typically results in lower company valuation.