How to determine the cost of equity

If we talk about the cost of capital, it is necessary to understand by this expression how much the company costs all the capital that it uses. To determine this value, a number of steps should be taken.

Instruction manual

1

The cost of capital can be considered as financial compliance with the size of the financial responsibility of the company, which it incurs for the use of borrowed and own capital to organize its activities. Determine the value of bonds issued by the investor. Their value will be almost equal to the interest paid on these bonds. At the same time, take into account the difference that exists between the declared value of a bond (stock) and between its real sale price. To do this, you need to divide the amount of net profit by the number of bonds (shares) issued by the company.

2

Calculate (calculate) the value of current dividends that are paid to shareholders, or those that are supposed to be received from this company (these are certain cash payments that are calculated from the company's net profit). Please note that there are some difficulties in predicting the expected value (amount) of the company's net profit and real dividends paid.

3

Determine the cost of all types of financing (borrowed capital of the company) and the cost of equity of the company. Determine the price and value of your company's capital assets. Depending on the degree of risk, the market profitability of the shares will be established, based on which you calculate the price of capital assets.

4

Calculate the weighted average cost of capital. Thus, the weighted average cost of capital helps to determine the level of real compensation to all investors who refuse. Here also take into account the fact that the share of investors in the field of company financing is unequal, which means that the contribution of each investor to the total amount of financing is taken into account.

market value of equity