Cost of equity

In this lesson

1. 0:00 Cost of equity introduction
2. 2:02 Systematic versus unsystematic risk
3. 4:09 Beta factor and share sensitivity
4. 5:44 Capital asset pricing model formula
5. 7:04 Adjusting beta for gearing changes
6. 8:30 Asset beta calculation method
7. 10:18 Dividend growth model approach
8. 13:05 Modigliani Miller Proposition Two
9. 14:28 Proposition Two worked example

About this lesson

information available. You'll understand how to measure systematic risk using beta, adjust beta for changes in gearing, and apply each formula with worked examples so you can confidently handle cost of equity questions in your exam. The capital asset pricing model assumes investors hold diversified portfolios and measures how sensitive a company's share price is to overall market movements through its beta factor. A beta greater than one means the share is riskier than the market average and will fluctuate more; a beta less than one indicates lower risk. You'll learn how to find a proxy company in the same industry, ungear its beta to remove its specific capital structure, and regear it to reflect your company's gearing—ensuring the beta accurately represents the financial and business risk you're evaluating. The dividend valuation model calculates cost of equity based on expected dividend growth, though this method is rarely tested in AFM. Modigliani Miller's Proposition Two offers an alternative when beta data isn't available (particularly for unlisted companies) and links cost of equity directly to gearing levels and the risk-free rate. By the end of this lesson, you'll know when to use each method and how to handle the calculations accurately under exam conditions.

Duration: 16m