Cost of Equity (Bond Yield Plus Premium)
Estimates the cost of equity using the bond yield plus risk premium method: it adds to the company's own long-term debt yield a risk premium for the gap between stocks and bonds. It's a quick alternative to the CAPM, useful when you lack a reliable beta: if the company pays 8% on its debt and the typical equity-over-debt premium is 4%, the cost of equity comes to around 12%. Enter the debt yield and the risk premium.
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Cost of Equity (Bond Yield Plus Premium)
Estimates the cost of equity using the bond yield plus risk premium method: it adds to the company's own long-term debt yield a risk premium for the gap between stocks and bonds. It's a quick alternative to the CAPM, useful when you lack a reliable beta: if the company pays 8% on its debt and the typical equity-over-debt premium is 4%, the cost of equity comes to around 12%. Enter the debt yield and the risk premium.
The shortcut to the cost of equity
Estimating the cost of equity via the CAPM requires a reliable beta, which doesn't always exist, especially for private companies or thinly-traded markets. The bond yield plus risk premium method offers a clever shortcut: it starts from what the company itself pays on its long-term debt and adds a premium for the risk difference between being a shareholder and being a creditor.
The logic is sound. If the market already prices the company's risk in the rate it pays to borrow, you just add the premium shareholders demand over creditors, historically around three to five percentage points. A company paying 8% on its debt would have a cost of equity in the 11% to 13% range. It's quick and dispenses with beta.
Enter the company's long-term debt yield and the risk premium you consider appropriate. The tool sums the two and returns the cost-of-equity estimate. Use it as a quick check or when you lack data for the CAPM, remembering the premium is the analyst's choice, not a market number.
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The results provided by this tool are for general informational and educational purposes only and do not constitute professional, financial, medical, legal, tax or accounting advice. Always confirm important decisions with a qualified professional and official sources.