cost of equity

The return that equity investors require on their investment in the firm.

where Dq is the dividend just paid and D1 is the next period's projected dividend. Notice that we have used the symbol RE (the E stands for equity) for the required return on the stock.

As we discussed in Chapter 8, we can rearrange this to solve for RE as follows:

Because RE is the return that the shareholders require on the stock, it can be interpreted as the firm's cost of equity capital.

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

VI. Cost of Capital and Long-Term Financial Policy

15. Cost of Capital

© The McGraw-Hill Companies, 2002

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