Formula
Cost of equity = Rf + β × ERP + size premium + company-specific premium. With an unlevered beta, β = βu × (1 + (1 − t) × D ÷ E), which the tool also reverses as a check. Rates are entered as percentages and shown to two decimals, with the arithmetic printed in full.
Source
Sharpe, W. (1964), “Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk,” Journal of Finance, for the model. Hamada, R. (1972), Journal of Finance, for the beta adjustment for leverage. Neither source supplies current inputs.
When to use it
Use it to build or test a discount rate behind an impairment test, a business valuation or another fair value estimate, including when you evaluate management's estimate under AU-C 540. Carry the result into the WACC calculator.
Limits
CAPM is one model with known weaknesses, and the result is only as good as the beta, premium and risk-free inputs you enter. The size and company-specific additions are judgmental and sit outside the model. Illustrative figures only. Check the result against your firm's methodology before relying on it.
Common questions
What is the CAPM formula?
Cost of equity = risk-free rate + beta × equity risk premium, where the equity risk premium is the expected market return minus the risk-free rate. The model comes from Sharpe (1964), with related work by Lintner and Mossin. Beta measures how the stock moves against the market.
What goes in the build-up additions?
Practitioners often add a size premium and a company-specific premium to the CAPM result when valuing smaller or less diversified companies. Both are judgments you source and document. Leave them at zero for plain CAPM.
Why relever beta?
A beta observed for a comparable company reflects that company's debt. To use it for a different capital structure, unlever it to an asset beta, then relever it at your target debt-to-equity ratio. This tool uses the Hamada form: levered beta = unlevered beta × (1 + (1 − tax rate) × debt ÷ equity). It assumes debt carries no beta of its own.
Where do the inputs come from?
You supply them. The risk-free rate is a Treasury yield matched to the horizon and dated at your valuation date. The equity risk premium and beta come from a source you name in the workpaper. The numbers prefilled here are illustrations and not market data.
How does this connect to WACC?
The cost of equity is one input to the weighted average cost of capital, alongside the after-tax cost of debt and the capital weights. Carry the result into the WACC calculator.
Runs in your browser. The figures you type are not sent to CORAA or stored. Check the result against your firm's methodology before relying on it.