What is an alternative to CAPM to calculate the Cost of Equity?
Answer
There is an alternative formula, but I’ve only ever seen this used during a class in college. The formula is below:
Cost of Equity = (Dividends per Share / Share Price) + Growth Rate of Dividends
The thought process here is that for companies where dividends are a larger-than-usual share of returns, you would use this formula. You could also use this when you don’t have all of the other variables to calculate CoE using CAPM.
Why this matters to bankers
Alternative methods are always nice to have but in this case, this is a very rare exception where bankers must use it.