What is the cost of equity and how can you calculate it in financial analysis?

In simpler terms, the cost of equity reflects the risk-reward relationship in stock ownership. Investors require a higher return to compensate for the inherent risk of owning shares compared to debt, which offers a fixed interest rate. Organisations consider this cost when making investment decisions and setting their capital structure.

The cost of equity is an important concept in financial analysis, because it helps assessing the feasibility of potential investment projects by comparing the expected return on those projects with the cost of equity. This information aids in making informed decisions about whether to pursue a particular investment opportunity or not.

Understanding the cost of equity is crucial in financial analysis. It allows us to evaluate if investing in certain projects is worthwhile by comparing the anticipated return on those projects with the cost of equity. This helps us decide whether to go ahead with an investment or not.

D'après mon expérience, les dirigeants sont surpris du co?t élevé du capital, lorsqu'il veulent vendre, mais à l'inverse, souhaitent un rendement important quand ils achètent ou investissent. Or le capital co?t très cher. Le cout moyen pondéré du capital (CMPC ou WACC) baisse grace avec la moyenne du cout du capital (15-30%), des OC (12-25%), des obligations (8-18%), dettes privées (7-14%), dettes mezzanines (6-12%) et dettes bancaires (3-7%). Plus le co?t du capital est élevé, plus la valorisation est faible. Et plus le co?t du capital est faible, plus la valorisation est élevée

The cost of equity represents the return a company must offer investors to entice them to invest in the firm's equity, reflecting the risk associated with investing in the company. It can be calculated using the Capital Asset Pricing Model (CAPM), which is given by the formula: Cost of Equity = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate), where Beta measures the volatility of the company's stock relative to the market.

Le co?t des capitaux propres est compris entre 15 et 30% / an. Plus la société est jeune et risquée, plus le taux est élevé: 30 à 40%. Plus la société est pérenne, grosse, et dérisquée, plus le taux est faible : 12 à 15%. Pour les PME, le taux est généralement 20 à 30% attendu. Et les ETI bénéficient d'un taux de 15 à 20% car elle sont généralement déjà assises sur plusieurs pays, ne sont plus dépendantes d'un seul dirigeant, ni de quelques clients, ou quelques fournisseur seulement.

You can figure out the cost of equity using the CAPM formula, which goes like this: Cost of Equity = Risk-free rate of return + Beta(Equity Risk Premium) In simpler terms, it's the bonus return investors want for putting their money in stocks, which comes with added risk. To calculate this risk, we multiply the Equity Risk Premium (ERP) by Beta and add a Risk-free rate. ERP is the difference between the market rate of return and the risk-free rate.

Instead of using only one method, we can actually combined 3 of the methods (or possibly other method as well) by giving weight to what you have conviction the most. This will smoothen the estimation result without disregarding any important variable.

L'actualisation des dividendes (DDM) est poche du Discounted Cash Flow (DCF). Mais je préfère le DCF car plus précis. La methode des dividendes analyse les dividendes qui devraient être versé en fonction de la stratégie de versement de dividendes des différentes sociétés du groupe, et en fonction des cash flow . La méthode des DCF dépend uniquement des cash flow futurs actualisés aujourd'hui, ce qui comporte moins d'aléas, mais déjà beaucoup

The beauty of the dividend discount model in estimating the cost of equity is its intuition and clarity, unlike CAPM which although popular assumes the beta is stable. In our experience, we can apply multi-stage dividend discount model to reflect different stages of growth of dividends (for different stages of the company) and also back out the implied cost of equity or the expected returns implied by the market by inputting market prices/fundamentals into the DDM formula.

It is worth noting that the beta in this formula reflects the volatility of the stock price or the shares in the company. The same formula can be used to determine the WACC (Weighted Average Cost of Capital) by replacing the beta of the stock price with the beta of the economic activity of the company you are analyzing. For example, the economic activity of a consumer goods company like Coca-Cola or P&G is less volatile than that of a social media company like Facebook or Snap

Mon expérience est beaucoup plus centrée sur le non coté. La valorisation des sociétés non cotées est désormais beaucoup plus élevées que les PME et ETI cotés comparables. Nous n'observons donc plus de décote d'illiquidité. Au contraire. Le WACC a tendance a baisser décennie après décennies. Mais la valorisation est toujours une rencontre en un acheteur et un vendeur.