{"id":31968,"date":"2025-10-22T10:53:35","date_gmt":"2025-10-22T15:53:35","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/?post_type=biws_kb&#038;p=31968"},"modified":"2025-11-20T18:57:33","modified_gmt":"2025-11-20T23:57:33","slug":"cost-of-equity","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/valuation\/cost-of-equity\/","title":{"rendered":"The Cost of Equity in Valuations for Public Companies, Startups, and More"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-flat ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">The Cost of Equity in Valuations for Public Companies, Startups, and More<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/breakingintowallstreet.com\/kb\/valuation\/cost-of-equity\/#Interpreting_the_Cost_of_Equity_Why_Does_Stock_%E2%80%9CCost%E2%80%9D_a_Company_Anything\">Interpreting the Cost of Equity: Why Does Stock \u201cCost\u201d a Company Anything?<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/breakingintowallstreet.com\/kb\/valuation\/cost-of-equity\/#What_is_a_%E2%80%9CGood%E2%80%9D_Cost_of_Equity_What_Are_the_Normal_Ranges\">What is a \u201cGood\u201d Cost of Equity? What Are the Normal Ranges?<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/breakingintowallstreet.com\/kb\/valuation\/cost-of-equity\/#Calculating_the_Cost_of_Equity_in_Real_Life_Examples_for_Western_Midstream_Partners_and_Steel_Dynamics\">Calculating the Cost of Equity in Real Life: Examples for Western Midstream Partners and Steel Dynamics<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/breakingintowallstreet.com\/kb\/valuation\/cost-of-equity\/#Calculating_the_Cost_of_Equity_by_Un-Levering_and_Re-Levering_Beta\">Calculating the Cost of Equity by Un-Levering and Re-Levering Beta<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/breakingintowallstreet.com\/kb\/valuation\/cost-of-equity\/#Alternate_Methods_for_Calculating_the_Cost_of_Equity_Based_on_Dividends_and_Net_Income\">Alternate Methods for Calculating the Cost of Equity Based on Dividends and Net Income<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/breakingintowallstreet.com\/kb\/valuation\/cost-of-equity\/#The_Cost_of_Equity_for_Startups_Speculative_Companies_and_Private_Assets\">The Cost of Equity for Startups, Speculative Companies, and Private Assets<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/breakingintowallstreet.com\/kb\/valuation\/cost-of-equity\/#The_Cost_of_Equity_vs_the_Cost_of_Debt_and_Changes_in_Different_Scenarios\">The Cost of Equity vs. the Cost of Debt and Changes in Different Scenarios<\/a><\/li><\/ul><\/nav><\/div>\n\n<blockquote><p><strong>Cost of Equity Definition:<\/strong> The Cost of Equity in corporate finance represents the annualized rate of return that investors target when they buy a company\u2019s Common Stock; to a company, it represents the cost of issuing additional Common Stock to operate its business, where the \u201ccost\u201d includes both dividends (cash cost) and the dilution from these issuances. The Cost of Equity is widely used in valuation and DCF analysis.<\/p><\/blockquote>\n<p>The most common formula for calculating the Cost of Equity is as follows:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31969 size-full\" title=\"Cost of Equity Formula\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104525\/01-Cost-of-Equity-Formula.jpg\" alt=\"Cost of Equity Formula\" width=\"2273\" height=\"111\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104525\/01-Cost-of-Equity-Formula.jpg 2273w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104525\/01-Cost-of-Equity-Formula-300x15.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104525\/01-Cost-of-Equity-Formula-1024x50.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104525\/01-Cost-of-Equity-Formula-768x38.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104525\/01-Cost-of-Equity-Formula-1536x75.jpg 1536w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104525\/01-Cost-of-Equity-Formula-2048x100.jpg 2048w\" sizes=\"(max-width: 2273px) 100vw, 2273px\" \/><\/p>\n<p>But there are other methods to calculate the Cost of Equity, including via the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/dividend-yield\/\" target=\"_blank\" rel=\"noopener\">Dividend Yield<\/a> and Dividend Growth for more mature companies with stable Dividend issuances:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31970 size-full\" title=\"Cost of Equity Based on Dividends and Net Income\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104546\/02-Cost-of-Equity-Dividends-Net-Income.jpg\" alt=\"Cost of Equity Based on Dividends and Net Income\" width=\"2417\" height=\"376\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104546\/02-Cost-of-Equity-Dividends-Net-Income.jpg 2417w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104546\/02-Cost-of-Equity-Dividends-Net-Income-300x47.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104546\/02-Cost-of-Equity-Dividends-Net-Income-1024x159.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104546\/02-Cost-of-Equity-Dividends-Net-Income-768x119.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104546\/02-Cost-of-Equity-Dividends-Net-Income-1536x239.jpg 1536w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104546\/02-Cost-of-Equity-Dividends-Net-Income-2048x319.jpg 2048w\" sizes=\"(max-width: 2417px) 100vw, 2417px\" \/><\/p>\n<p>The \u201c<a href=\"https:\/\/breakingintowallstreet.com\/kb\/finance\/risk-free-rate\/\" target=\"_blank\" rel=\"noopener\">Risk-Free Rate<\/a>\u201d is typically based on 10-year government bond yields denominated in the company\u2019s currency (e.g., US Treasuries for U.S. companies or Eurobonds for European companies).<\/p>\n<p>The \u201cEquity Risk Premium\u201d (ERP) represents the additional percentage the stock market is expected to return <em>over<\/em> this Risk-Free Rate over the long term (e.g., it\u2019s 6% if the RFR is 4% and the stock market\u2019s long-term average annualized return is 10%).<\/p>\n<p><span><a href=\"http:\/\/pages.stern.nyu.edu\/~adamodar\/New_Home_Page\/datafile\/ctryprem.html\" target=\"_blank\" rel=\"noopener\">Professor Aswath Damodaran at NYU maintains the best free data set for ERP by country<\/a><\/span>.<\/p>\n<p>You normally pick the ERP based on the country in which the company is listed on the stock market or the country of its most significant operations.<\/p>\n<p>Finally, the \u201cBeta\u201d component represents how risky <em>this specific company<\/em> is relative to the entire stock market.<\/p>\n<p>If Beta is 1.0, when the stock market goes up 10%, this company\u2019s stock price also increases by 10%.<\/p>\n<p>If it\u2019s 2.0, the company\u2019s stock price increases by 20% (and falls by 20% if the overall market falls by 10%).<\/p>\n<p>You can find Beta for public companies on services like Google\/Yahoo Finance, FinViz, Bloomberg, and Capital IQ.<\/p>\n<p>For example, if the current Risk-Free Rate is 4.0%, the Equity Risk Premium is 5.0%, and a company\u2019s Beta is 1.2, its Cost of Equity = 4.0% + 5.0% * 1.2 = 10.0%.<\/p>\n<p>It\u2019s slightly riskier than the entire stock market, which is why the Cost of Equity is 10.0% rather than 9.0%.<\/p>\n<p><strong>The Cost of Equity is always higher than the Cost of Debt because the risk and potential returns are both higher, the investors are less senior, and Equity is not tax-advantaged.<\/strong><\/p>\n<p>The most common use case for the Cost of Equity is calculating <a href=\"https:\/\/mergersandinquisitions.com\/wacc-formula\/\" target=\"_blank\" rel=\"noopener\">WACC<\/a>, or the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/finance\/discount-rate\/\" target=\"_blank\" rel=\"noopener\">Discount Rate<\/a> in a <a href=\"https:\/\/mergersandinquisitions.com\/dcf-model\/\" target=\"_blank\" rel=\"noopener\">DCF model<\/a> based on <a href=\"https:\/\/breakingintowallstreet.com\/kb\/discounted-cash-flow-analysis-dcf\/unlevered-free-cash-flow\/\" target=\"_blank\" rel=\"noopener\">Unlevered Free Cash Flow<\/a>.<\/p>\n<p>It is also used in a DCF based on <a href=\"https:\/\/breakingintowallstreet.com\/kb\/valuation\/levered-free-cash-flow\/\" target=\"_blank\" rel=\"noopener\">Levered FCF<\/a>, in the <a href=\"https:\/\/mergersandinquisitions.com\/dividend-discount-model\/\" target=\"_blank\" rel=\"noopener\">Dividend Discount Model<\/a>, and even in <span><a href=\"https:\/\/breakingintowallstreet.com\/kb\/debt-equity\/debt-vs-equity-analysis\/\" target=\"_blank\" rel=\"noopener\">Debt vs. Equity analysis<\/a><\/span> and merger models when calculating <a href=\"https:\/\/breakingintowallstreet.com\/kb\/ma-and-merger-models\/eps-accretion-dilution\/\" target=\"_blank\" rel=\"noopener\">EPS accretion\/dilution<\/a>.<\/p>\n<h3><strong>Files &amp; Resources:<\/strong><\/h3>\n<ul>\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.dualstack.us-east-1.amazonaws.com\/107-33-Cost-of-Equity-Examples.xlsx\" target=\"_blank\" rel=\"noopener\">Cost of Equity \u2013 Excel Examples (XL)<\/a><\/li>\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.dualstack.us-east-1.amazonaws.com\/107-33-Cost-of-Equity-Debt-Changes.xlsx\" target=\"_blank\" rel=\"noopener\">Cost of Equity and WACC Changes as the Capital Structure Changes (XL)<\/a><\/li>\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.dualstack.us-east-1.amazonaws.com\/107-33-Cost-of-Equity-Slides.pdf\" target=\"_blank\" rel=\"noopener\">Cost of Equity \u2013 Presentation Slides (PDF)<\/a><\/li>\n<li><span> <\/span><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.dualstack.us-east-1.amazonaws.com\/107-33-WES-10-K-Excerpts.pdf\" target=\"_blank\" rel=\"noopener\">Western Midstream Partners \u2013 10-K Excerpts (PDF)<\/a><\/li>\n<li><span><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.dualstack.us-east-1.amazonaws.com\/107-33-STLD-10-K-Excerpts.pdf\" target=\"_blank\" rel=\"noopener\">Steel Dynamics \u2013 10-K Excerpts (PDF)<\/a><\/span><\/li>\n<\/ul>\n<h3><strong>Video Table of Contents:<\/strong><\/h3>\n<ul>\n<li><strong>0:00:<\/strong> Introduction<\/li>\n<li><strong>6:20:<\/strong> Part 1: Real-Life Examples (WES and STLD)<\/li>\n<li><strong>9:55:<\/strong> Part 2: Cost of Equity Based on Dividends and Net Income<\/li>\n<li><strong>12:44:<\/strong> Part 3: Startups, Speculative Companies, and Other Uses<\/li>\n<li><strong>14:31:<\/strong> Part 4: How Does the Cost of Equity Change When\u2026<\/li>\n<li><strong>16:12:<\/strong> Recap and Summary<\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"Interpreting_the_Cost_of_Equity_Why_Does_Stock_%E2%80%9CCost%E2%80%9D_a_Company_Anything\"><\/span><strong>Interpreting the Cost of Equity: Why Does Stock \u201cCost\u201d a Company Anything?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>One common question we get is: \u201cI understand how Dividends cost a company something, but how does an annualized increase in the stock price correspond to any cost? The company does not \u2018pay\u2019 for its stock price to go up.\u201d<\/p>\n<p>Great question!<\/p>\n<p><strong>Just like the Cost of Debt represents the \u201ccost\u201d of issuing <em>additional Debt<\/em>, the Cost of Equity represents the \u201ccost\u201d of issuing <em>additional Common Stock<\/em>.<\/strong><\/p>\n<p>When a company issues additional Common Stock, its existing shareholders <strong>get diluted<\/strong>, so they own a lower percentage afterward.<\/p>\n<p>For example, let\u2019s say that Vanguard owns 10% of Company A.<\/p>\n<p>If Company A now issues a significant amount of Stock, and Vanguard does not buy any new shares, its ownership might fall to <strong>8%.<\/strong><\/p>\n<p>It owns the same <em>number<\/em> of shares, but they represent a <em>reduced percentage<\/em> of the company.<\/p>\n<p>If this company\u2019s stock price is expected to increase by 12% next year, Vanguard will not receive all these gains since it now has a reduced percentage.<\/p>\n<p><strong>The existing investors \u201cpay for\u201d this stock issuance, and corporate valuation is always from the perspective of the company\u2019s investors.<\/strong><\/p>\n<div class='code-block code-block-2' style='margin: 8px 0; clear: both;'>\n<div class=\"kb-adinsert-modal\">\n    <div class=\"kb-adinsert-top\">\n      <div class=\"media\">\n          <img decoding=\"async\" class=\"alignnone size-full wp-image-28448\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/24164120\/adv-fm-tile.png\" alt=\"PowerPoint Pro\" width=\"128\" height=\"128\" \/>\n      <\/div>\n      <div class=\"content\">\n          <h3>Master Financial Modeling for Investment Banking With <strong>BIWS Core Financial Modeling<\/strong><\/h3>\n      <\/div>\n    <\/div>\n    \n    <div class=\"full_text\">\n    \t<ul>\n        \t<li>\n            \t<h4>Become a financial modeling pro<\/h4>\n              <p>158 videos, detailed written guides, Excel files, quizzes, and more<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Complete 10+ detailed global case studies<\/h4>\n            <p>These include both the theory and the practical applications<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Prepare for your internship or full-time job<\/h4>\n            <p>Gain the skills you need to \u201chit the ground running\u201d on Day 1\n\n<\/p>\n\t\t\t  <\/li>\n      <\/ul>\n        \n      <a class=\"cta-link orange-button-medium\" href=\"https:\/\/breakingintowallstreet.com\/core-financial-modeling\/\" target=\"_blank\">Full Details<\/a>\n      \n      <a class=\"cta-link orange-button-medium bg-blue\" href=\"https:\/\/biws-support.s3.us-east-1.amazonaws.com\/Course-Outlines\/Core-Financial-Modeling-Course-Outline.pdf\" target=\"_blank\" rel=\"noopener\">Short Outline<\/a>\n    <\/div>\n<\/div><\/div>\n\n<h2><span class=\"ez-toc-section\" id=\"What_is_a_%E2%80%9CGood%E2%80%9D_Cost_of_Equity_What_Are_the_Normal_Ranges\"><\/span><strong>What is a \u201cGood\u201d Cost of Equity? What Are the Normal Ranges?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>In most cases, the Cost of Equity falls into one of three ranges:<\/p>\n<ul>\n<li><strong>5 \u2013 10%:<\/strong> \u201cLess risky\u201d companies are in this range; examples might be utility companies, many REITs, and mature consumer staples companies.<\/li>\n<li><strong>10 \u2013 15%:<\/strong> \u201cModerately risky\u201d companies, such as technology, industrials, or transportation firms, might go here.<\/li>\n<li><strong>Above 15%:<\/strong> These tend to be much riskier companies that are in \u201cgrowth mode\u201d (startups), in emerging\/frontier markets, or in special situations such as distress or bankruptcy.<\/li>\n<\/ul>\n<p>In a valuation, you normally know <strong>the rough range<\/strong> your company is in, and you attempt to narrow it down to something more precise:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31971 size-full\" title=\"Cost of Equity Ranges\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104701\/03-Cost-of-Equity-Ranges.jpg\" alt=\"Cost of Equity Ranges\" width=\"2423\" height=\"997\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104701\/03-Cost-of-Equity-Ranges.jpg 2423w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104701\/03-Cost-of-Equity-Ranges-300x123.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104701\/03-Cost-of-Equity-Ranges-1024x421.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104701\/03-Cost-of-Equity-Ranges-768x316.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104701\/03-Cost-of-Equity-Ranges-1536x632.jpg 1536w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104701\/03-Cost-of-Equity-Ranges-2048x843.jpg 2048w\" sizes=\"(max-width: 2423px) 100vw, 2423px\" \/><\/p>\n<p>An appropriate <strong>spread<\/strong> is roughly 2 \u2013 3%, so the Cost of Equity could be something like 5 \u2013 7% or 8 \u2013 10%, but a range like 5 \u2013 10% is too wide.<\/p>\n<p>So, if you get results like these from calculating the Cost of Equity via different methods:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31972 size-full\" title=\"Cost of Equity Comparison Calculations\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104721\/04-Cost-of-Equity-Comparison.jpg\" alt=\"Cost of Equity Comparison Calculations\" width=\"1593\" height=\"732\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104721\/04-Cost-of-Equity-Comparison.jpg 1593w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104721\/04-Cost-of-Equity-Comparison-300x138.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104721\/04-Cost-of-Equity-Comparison-1024x471.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104721\/04-Cost-of-Equity-Comparison-768x353.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104721\/04-Cost-of-Equity-Comparison-1536x706.jpg 1536w\" sizes=\"(max-width: 1593px) 100vw, 1593px\" \/><\/p>\n<p>The appropriate <strong>range<\/strong> might be 8 \u2013 10%.<\/p>\n<p>You would <strong>not<\/strong> want to use a range of 7 \u2013 17% because that\u2019s far too wide to be useful, and the 17% here is an outlier that might be based on spotty data.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Calculating_the_Cost_of_Equity_in_Real_Life_Examples_for_Western_Midstream_Partners_and_Steel_Dynamics\"><\/span><strong>Calculating the Cost of Equity in Real Life: Examples for Western Midstream Partners and Steel Dynamics<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>When calculating the Cost of Equity in real life, <strong>the key challenges<\/strong> differ from those in <a href=\"https:\/\/breakingintowallstreet.com\/kb\/valuation\/cost-of-debt\/\" target=\"_blank\" rel=\"noopener\">the Cost of Debt calculation<\/a>.<\/p>\n<p>There, you may run into problems due to multiple tranches of Debt, a lack of disclosed market values, or companies with no Debt.<\/p>\n<p>None of this is possible for the Cost of Equity because all companies have Equity, the market values are easy to determine, and there\u2019s only a single class of common shares, so the challenges relate to <strong>conflicting information and calculation methods.<\/strong><\/p>\n<p>For Western Midstream Partners, <a href=\"https:\/\/breakingintowallstreet.com\/oil-gas-modeling\/\" target=\"_blank\" rel=\"noopener\">a Midstream MLP company in the oil &amp; gas industry<\/a>, we calculate the Cost of Equity using three different methods, all of which employ the Risk-Free Rate + Equity Risk Premium * Levered Beta formula.<\/p>\n<p>The <strong>difference<\/strong> lies in the Levered Beta calculation:<\/p>\n<ol>\n<li><strong>Historical Levered Beta<\/strong> \u2013 With this method, we use the company\u2019s historical Levered Beta from online sources (FinViz, Google Finance, etc.), which was a very high 2.33 at the time of this valuation (!!).<\/li>\n<li><strong>Re-Levered Beta, Current Capital Structure<\/strong> \u2013 We \u201cun-lever\u201d Beta for each <a href=\"https:\/\/breakingintowallstreet.com\/kb\/valuation\/comparable-company-analysis-cca\/\" target=\"_blank\" rel=\"noopener\">comparable public company<\/a>, take the median, and \u201cre-lever\u201d it based on Western Midstream\u2019s current capital structure<\/li>\n<li><strong>Re-Levered Beta, Comps\u2019 Capital Structure<\/strong> \u2013 Similar, but we re-lever the median Unlevered Beta based on the median Debt, Equity, and Preferred Stock percentages of the comparable companies.<\/li>\n<\/ol>\n<p>For Western Midstream Partners, the latter two methods produce similar results, while the third one is completely different:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31973 size-full\" title=\"Western Midstream Partners - Cost of Equity\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104748\/05-Western-Midstream-Cost-of-Equity.jpg\" alt=\"Western Midstream Partners - Cost of Equity\" width=\"1123\" height=\"348\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104748\/05-Western-Midstream-Cost-of-Equity.jpg 1123w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104748\/05-Western-Midstream-Cost-of-Equity-300x93.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104748\/05-Western-Midstream-Cost-of-Equity-1024x317.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104748\/05-Western-Midstream-Cost-of-Equity-768x238.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104748\/05-Western-Midstream-Cost-of-Equity-325x100.jpg 325w\" sizes=\"(max-width: 1123px) 100vw, 1123px\" \/><\/p>\n<p>For Steel Dynamics, all three methods produce very similar results, so it\u2019s easy to conclude that its Cost of Equity should be in the <strong>11 \u2013 13% range:<\/strong><\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31974 size-full\" title=\"Steel Dynamics - Cost of Equity\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104814\/06-Steel-Dynamics-Cost-of-Equity.jpg\" alt=\"Steel Dynamics - Cost of Equity\" width=\"1130\" height=\"339\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104814\/06-Steel-Dynamics-Cost-of-Equity.jpg 1130w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104814\/06-Steel-Dynamics-Cost-of-Equity-300x90.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104814\/06-Steel-Dynamics-Cost-of-Equity-1024x307.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104814\/06-Steel-Dynamics-Cost-of-Equity-768x230.jpg 768w\" sizes=\"(max-width: 1130px) 100vw, 1130px\" \/><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Calculating_the_Cost_of_Equity_by_Un-Levering_and_Re-Levering_Beta\"><\/span><strong>Calculating the Cost of Equity by Un-Levering and Re-Levering Beta<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>All companies have two types of risk: Risk from operating their core business and risk from leverage (Debt).<\/p>\n<p>\u201cBeta\u201d on sites like Yahoo\/Google Finance and FinViz includes both risks, so it is known as \u201cLevered Beta.\u201d<\/p>\n<p>To separate the business risk, the first step is to find a set of comparable companies and look up the Debt, Equity, Preferred Stock, Beta, and Tax Rate figures for each one.<\/p>\n<p>You can then \u201cun-lever\u201d Beta to <strong>separate<\/strong> the operational and financial risk with this formula:<\/p>\n<p><strong>Unlevered Beta<\/strong> = Levered Beta \/ (1 + Debt \/ Equity * (1 \u2013 Tax Rate) + Preferred \/ Equity)<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31975 size-full\" title=\"Unlevered Beta Calculation\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104837\/07-Unlevered-Beta.jpg\" alt=\"Unlevered Beta Calculation\" width=\"2079\" height=\"448\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104837\/07-Unlevered-Beta.jpg 2079w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104837\/07-Unlevered-Beta-300x65.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104837\/07-Unlevered-Beta-1024x221.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104837\/07-Unlevered-Beta-768x165.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104837\/07-Unlevered-Beta-1536x331.jpg 1536w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104837\/07-Unlevered-Beta-2048x441.jpg 2048w\" sizes=\"(max-width: 2079px) 100vw, 2079px\" \/><\/p>\n<p>Dividing by a term that starts with \u201c1 +\u201d ensures that Unlevered Beta will always be less than or equal to Levered Beta.<\/p>\n<p>Once you have this for all the peer companies, you can take the median and \u201cre-lever Beta\u201d by multiplying by this term instead:<\/p>\n<p><strong>Re-Levered Beta<\/strong> = Unlevered Beta * (1 + Debt \/ Equity * (1 \u2013 Tax Rate) + Preferred \/ Equity)<\/p>\n<p>\u201cRe-levering\u201d Beta takes the operational risk from the comparable companies and then adjusts it based on this company\u2019s risk from leverage:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31976 size-full\" title=\"Relevered Beta Calculation\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104857\/08-Relevered-Beta.jpg\" alt=\"Relevered Beta Calculation\" width=\"2106\" height=\"269\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104857\/08-Relevered-Beta.jpg 2106w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104857\/08-Relevered-Beta-300x38.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104857\/08-Relevered-Beta-1024x131.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104857\/08-Relevered-Beta-768x98.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104857\/08-Relevered-Beta-1536x196.jpg 1536w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104857\/08-Relevered-Beta-2048x262.jpg 2048w\" sizes=\"(max-width: 2106px) 100vw, 2106px\" \/><\/p>\n<p>You could use either the subject company\u2019s <em>current<\/em> capital structure or the peer companies\u2019 median numbers; we tend to do both to capture a range of values for the Cost of Equity.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Alternate_Methods_for_Calculating_the_Cost_of_Equity_Based_on_Dividends_and_Net_Income\"><\/span><strong>Alternate Methods for Calculating the Cost of Equity Based on Dividends and Net Income<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>In addition to the methods above, you can also calculate the Cost of Equity based on <strong>Dividends<\/strong> or <strong>Net Income.<\/strong><\/p>\n<p>The formulas are simple:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31970 size-full\" title=\"Cost of Equity Based on Dividends and Net Income\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104546\/02-Cost-of-Equity-Dividends-Net-Income.jpg\" alt=\"Cost of Equity Based on Dividends and Net Income\" width=\"2417\" height=\"376\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104546\/02-Cost-of-Equity-Dividends-Net-Income.jpg 2417w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104546\/02-Cost-of-Equity-Dividends-Net-Income-300x47.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104546\/02-Cost-of-Equity-Dividends-Net-Income-1024x159.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104546\/02-Cost-of-Equity-Dividends-Net-Income-768x119.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104546\/02-Cost-of-Equity-Dividends-Net-Income-1536x239.jpg 1536w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104546\/02-Cost-of-Equity-Dividends-Net-Income-2048x319.jpg 2048w\" sizes=\"(max-width: 2417px) 100vw, 2417px\" \/><\/p>\n<p>The Dividend method works best for mature, stable companies that issue Dividends on a predictable basis, such as utilities or banks.<\/p>\n<p>The Net Income method is more common for assessing EPS accretion\/dilution in M&amp;A deals, but it can also work for standalone companies.<\/p>\n<p>For Western Midstream Partners here, the projected \u201cDistribution Yield\u201d is <strong>8.3%<\/strong>.<\/p>\n<p>The Distribution Growth Rate varies, but it\u2019s in the 3 \u2013 4% range over the next several years of the projection model.<\/p>\n<p>So, based on Dividends, the Cost of Equity is in the <strong>11 \u2013 12% range<\/strong> for this company (probably on the high side).<\/p>\n<p>With the other method, Western Midstream\u2019s projected Net Income was $1.4 billion, and its Market Cap at the time of this analysis was $15.7 billion, so its Cost of Equity was approximately <strong>9%<\/strong>.<\/p>\n<p>You can see how all these methods compare below:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31972 size-full\" title=\"Cost of Equity Comparison Calculations\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104721\/04-Cost-of-Equity-Comparison.jpg\" alt=\"Cost of Equity Comparison Calculations\" width=\"1593\" height=\"732\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104721\/04-Cost-of-Equity-Comparison.jpg 1593w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104721\/04-Cost-of-Equity-Comparison-300x138.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104721\/04-Cost-of-Equity-Comparison-1024x471.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104721\/04-Cost-of-Equity-Comparison-768x353.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22104721\/04-Cost-of-Equity-Comparison-1536x706.jpg 1536w\" sizes=\"(max-width: 1593px) 100vw, 1593px\" \/><\/p>\n<h2><span class=\"ez-toc-section\" id=\"The_Cost_of_Equity_for_Startups_Speculative_Companies_and_Private_Assets\"><\/span><strong>The Cost of Equity for Startups, Speculative Companies, and Private Assets<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Outside of mature\/public companies, <strong>the Cost of Equity could be almost anything.<\/strong><\/p>\n<p>For example, it\u2019s not unusual to see Discount Rates of 30%, 50%, or even 70%+ for tech startups, depending on their stage and revenue.<\/p>\n<p>These numbers are not based on the Equity Risk Premium or Levered Beta, but rather the <strong>high expected failure rate<\/strong> for most startups.<\/p>\n<p>Rough guidelines for the Discount Rate by startup stage might be:<\/p>\n<ul>\n<li><strong>Seed<\/strong>: 50 \u2013 70%+<\/li>\n<li><strong>Series A:<\/strong> 30 \u2013 50%<\/li>\n<li><strong>Series B:<\/strong> 20 \u2013 30%<\/li>\n<li><strong>Series C \/ D \/ Beyond:<\/strong> 10 \u2013 20%<\/li>\n<\/ul>\n<p><a href=\"https:\/\/breakingintowallstreet.com\/kb\/valuation\/startup-valuation\/\" target=\"_blank\" rel=\"noopener\">In a startup DCF<\/a>, you would normally start at a very high Discount Rate and then scale it down over time as the startup grows and generates revenue.<\/p>\n<p>Companies in emerging\/frontier markets and stressed\/distressed companies are also in this category.<\/p>\n<p>There are no universal guidelines for these firms, but you calculate the Cost of Equity the normal way and then add a <strong>risk premium<\/strong> to account for the uncertainty around geopolitics or the company\u2019s turnaround plan.<\/p>\n<p>Finally, in some industries, such as <a href=\"https:\/\/breakingintowallstreet.com\/kb\/project-finance\/\" target=\"_blank\" rel=\"noopener\">Project Finance<\/a> and <a href=\"https:\/\/breakingintowallstreet.com\/kb\/real-estate-modeling\/\" target=\"_blank\" rel=\"noopener\">Real Estate<\/a>, the Cost of Equity is based on investors\u2019 <strong>targeted equity returns.<\/strong><\/p>\n<p>In other words, if an infrastructure company targets a 12% Equity IRR when developing new solar plants, its Cost of Equity for all such developments will be 12%.<\/p>\n<p>You can then compare the projected Equity IRR to this 12% Cost of Equity to assess projects.<\/p>\n<p>It\u2019s similar to comparing the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/return-on-equity-roe\/\" target=\"_blank\" rel=\"noopener\">Return on Equity (ROE)<\/a> and the Cost of Equity for <a href=\"https:\/\/breakingintowallstreet.com\/kb\/bank-modeling\/\" target=\"_blank\" rel=\"noopener\">banks and financial institutions<\/a>.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"The_Cost_of_Equity_vs_the_Cost_of_Debt_and_Changes_in_Different_Scenarios\"><\/span><strong>The Cost of Equity vs. the Cost of Debt and Changes in Different Scenarios<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>The Cost of Equity is higher than the Cost of Debt because of the risk\/return profile, the seniority, and the tax treatment.<\/p>\n<p>Common shareholders take on far more <strong>risk<\/strong> than lenders (Debt investors) because a company\u2019s stock price could move in any direction.<\/p>\n<p>But a corporate bond is highly unlikely to drop by 90%+ unless the company implodes.<\/p>\n<p>The bondholders receive fixed payments in each period based on the stated coupon rate, so there\u2019s also far less risk of failing to earn the targeted returns.<\/p>\n<p>The lenders are <strong>senior<\/strong> to the common shareholders because they have a higher claim to the company\u2019s assets in a bankruptcy or liquidation, which also reduces their risk.<\/p>\n<p>Finally, <a href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/interest-tax-shield\/\" target=\"_blank\" rel=\"noopener\">the interest paid on Debt is tax-deductible<\/a>, while Dividends paid to the common shareholders are not, so the Cost of Debt tends to be lower due to the multiplication by this (1 \u2013 Tax Rate) term in the formula.<\/p>\n<p><a href=\"https:\/\/breakingintowallstreet.com\/kb\/discounted-cash-flow-analysis-dcf\/wacc-formula\/\" target=\"_blank\" rel=\"noopener\">A common interview question is: \u201cIf <strong>[Variable X]<\/strong> changes, how do the Cost of Equity and WACC change?\u201d<\/a><\/p>\n<p>\u201cVariable X\u201d could be the Risk-Free Rate, Equity Risk Premium, Beta, the Company Size, or dozens of other factors.<\/p>\n<p>When in doubt, think: \u201cIs the overall risk <em>higher<\/em> or <em>lower<\/em> with this change?\u201d<\/p>\n<p>For example, smaller companies are usually riskier than larger ones, so the Cost of Equity tends to be higher for smaller companies.<\/p>\n<p>Since the Risk-Free Rate and Equity Risk Premium are both <strong>additions<\/strong> in the Cost of Equity formula, higher values for these increase the Cost of Equity, while lower values reduce it.<\/p>\n<p>You can see a set of potential changes and their effects below:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31977 size-full\" title=\"Cost of Equity Changes\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22105013\/09-Cost-of-Equity-Changes.jpg\" alt=\"Cost of Equity Changes\" width=\"1402\" height=\"1119\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22105013\/09-Cost-of-Equity-Changes.jpg 1402w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22105013\/09-Cost-of-Equity-Changes-300x239.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22105013\/09-Cost-of-Equity-Changes-1024x817.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/10\/22105013\/09-Cost-of-Equity-Changes-768x613.jpg 768w\" sizes=\"(max-width: 1402px) 100vw, 1402px\" \/><\/p>\n","protected":false},"excerpt":{"rendered":"<p>The Cost of Equity in corporate finance represents the annualized rate of return that investors target when they buy a company\u2019s Common Stock; to a company, it represents the cost of issuing additional Common Stock to operate its business, where the \u201ccost\u201d includes both dividends (cash cost) and the dilution from these issuances. The Cost of Equity is widely used in valuation and DCF analysis.<\/p>\n","protected":false},"featured_media":0,"template":"","class_list":["post-31968","biws_kb","type-biws_kb","status-publish","hentry","kb_category-valuation"],"acf":[],"_links":{"self":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb\/31968","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb"}],"about":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/types\/biws_kb"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=31968"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}