There are several methods to calculate the cost of equity, but the most commonly used are:
Capital Asset Pricing Model (CAPM): This model calculates the cost of equity as the sum of the risk-free rate, plus the beta of the stock times the market risk premium. Dividend Discount Model (DDM): Primarily used for companies that pay dividends, this model calculates the cost of equity as the dividend yield plus the growth rate of dividends. Build-Up Method: Used for small businesses, this method starts with the risk-free rate and adds premiums for various risk factors such as company size, industry, and specific company risks.