Cost of equity

Cost of equity is an opportunity cost, not a fixed contractual payment. It may be estimated using CAPM from systematic risk, or using a dividend growth model from expected dividends, market price and growth. Each model has assumptions and estimation limitations. Ordinary dividends do not normally create the corporate interest tax shield used for debt in WACC. The cost of retained earnings reflects shareholders' opportunity cost as well, although issuing new equity may add flotation costs. Use the rate for equity cash flows, rather than automatically for cash flows available to all finance providers.