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Learn Cost of Equity Calculation Example | Cash Flow Forecasting and Discount Rate Fundamentals
Mastering Discounted Cash Flow Analysis with Excel
course content

Course Content

Mastering Discounted Cash Flow Analysis with Excel

Mastering Discounted Cash Flow Analysis with Excel

1. Introduction to Business Valuation
2. Understanding Discounted Cash Flow (DCF) Analysis
3. Cash Flow Forecasting and Discount Rate Fundamentals
4. WACC, Terminal Value & Sensitivity Analysis
5. Building a DCF Valuation Model in Excel
6. Practical DCF Case Study – Company Valuation in Action

book
Cost of Equity Calculation Example

Let's put the CAPM and Build-Up Method side-by-side using a real companyβ€”Teslaβ€”to illustrate how different inputs affect your output.

Recap of the CAPM Formula

CostΒ ofΒ Equity=Rf+Ξ²Γ—(Rmβˆ’Rf)\text{Cost of Equity} = R_f + \beta \times (R_m - R_f)

Where:

  • RfR_f = 4.31% (risk-free rate);

  • Ξ²\beta = 2.58 (Tesla's beta);

  • RmR_m = 9% (market return).

With these values:

CostΒ ofΒ Equity=4.31%+2.58Γ—(9%βˆ’4.31%)β‰ˆ16.14%\text{Cost of Equity} = 4.31\% + 2.58 \times (9\% - 4.31\%) \approx 16.14\%

The high beta reflects Tesla's volatility, which significantly amplifies the equity costβ€”something investors demand as compensation for risk.

Build-Up Method in Parallel

Let's assume for comparison:

  • Risk-free rate: 4.31%;

  • Equity Risk Premium: 5%;

  • Size Premium: 1%;

  • Industry Risk Premium: 2%;

  • Company-Specific Premium: 1.5%.

CostΒ ofΒ Equity=4.31%+5%+1%+2%+1.5%=13.81%\text{Cost of Equity} = 4.31\% + 5\% + 1\% + 2\% + 1.5\% = 13.81\%

Even though both methods are valid, they yield different results. The Build-Up Method often produces more conservative estimates for private firms or startups where beta isn't well-defined.

  • CAPM is dynamic and market-based, suitable for public companies with reliable data;

  • Build-Up is additive and more controllable, ideal for private or high-uncertainty contexts;

  • The cost of equity is not a fixed numberβ€”it reflects your assumptions and context.

Everything was clear?

How can we improve it?

Thanks for your feedback!

SectionΒ 3. ChapterΒ 7

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course content

Course Content

Mastering Discounted Cash Flow Analysis with Excel

Mastering Discounted Cash Flow Analysis with Excel

1. Introduction to Business Valuation
2. Understanding Discounted Cash Flow (DCF) Analysis
3. Cash Flow Forecasting and Discount Rate Fundamentals
4. WACC, Terminal Value & Sensitivity Analysis
5. Building a DCF Valuation Model in Excel
6. Practical DCF Case Study – Company Valuation in Action

book
Cost of Equity Calculation Example

Let's put the CAPM and Build-Up Method side-by-side using a real companyβ€”Teslaβ€”to illustrate how different inputs affect your output.

Recap of the CAPM Formula

CostΒ ofΒ Equity=Rf+Ξ²Γ—(Rmβˆ’Rf)\text{Cost of Equity} = R_f + \beta \times (R_m - R_f)

Where:

  • RfR_f = 4.31% (risk-free rate);

  • Ξ²\beta = 2.58 (Tesla's beta);

  • RmR_m = 9% (market return).

With these values:

CostΒ ofΒ Equity=4.31%+2.58Γ—(9%βˆ’4.31%)β‰ˆ16.14%\text{Cost of Equity} = 4.31\% + 2.58 \times (9\% - 4.31\%) \approx 16.14\%

The high beta reflects Tesla's volatility, which significantly amplifies the equity costβ€”something investors demand as compensation for risk.

Build-Up Method in Parallel

Let's assume for comparison:

  • Risk-free rate: 4.31%;

  • Equity Risk Premium: 5%;

  • Size Premium: 1%;

  • Industry Risk Premium: 2%;

  • Company-Specific Premium: 1.5%.

CostΒ ofΒ Equity=4.31%+5%+1%+2%+1.5%=13.81%\text{Cost of Equity} = 4.31\% + 5\% + 1\% + 2\% + 1.5\% = 13.81\%

Even though both methods are valid, they yield different results. The Build-Up Method often produces more conservative estimates for private firms or startups where beta isn't well-defined.

  • CAPM is dynamic and market-based, suitable for public companies with reliable data;

  • Build-Up is additive and more controllable, ideal for private or high-uncertainty contexts;

  • The cost of equity is not a fixed numberβ€”it reflects your assumptions and context.

Everything was clear?

How can we improve it?

Thanks for your feedback!

SectionΒ 3. ChapterΒ 7
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