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Implied Cost of Equity Calculator

Instead of building a required return bottom-up (beta, risk-free rate, equity risk premium — see the WACC calculator for that), this backs it out top-down from what the market is already paying: a stock's price-to-book ratio, its return on equity, and its expected growth. Add a few companies or sectors below and compare — the same logic behind Aswath Damodaran's published industry ROE/P-BV data, computed live on numbers you enter. Nothing you enter leaves this page.

Companies / sectors

Name P/B ratio ROE (%) Growth (%) Implied required return

P/B ratio = current share price ÷ book value per share — both are on any stock quote page or the company's latest balance sheet. ROE = net income ÷ book value of equity, most recent year. Growth is your own forward estimate (Damodaran's shortcut: g ≈ (1 − payout ratio) × ROE, if you don't have a better one).

Context

The logic

Start from a simple dividend discount model: P₀ = DPS₁ / (r − g). Substitute in the return on equity (ROE = earnings ÷ book value) and the payout ratio, and — for a company in stable growth, using next period's expected ROE — it reduces to:

P/BV = (ROE − g) / (r − g)

Rearranged to solve for the one variable that's genuinely hard to observe directly — the market's required rate of return, r:

r = g + (ROE − g) / P/BV

The intuition: a company trading at a price-to-book ratio above 1 is one the market expects to earn a return on equity above its own required return — the premium over book value is compensation for exactly that gap. A P/BV below 1 says the opposite: the market doesn't believe this business earns its own cost of equity. Solving the equation for r instead of P/BV just runs that logic in reverse — given what the market is already paying, what required return does that price imply?

Where this is honest about its limits

This assumes stable, constant growth forever — it breaks down (and can produce a nonsensical or even negative implied return) for high-growth or negative-ROE companies, exactly like the Gordon growth model it's built on. It's also only as good as your growth estimate: get g wrong and the implied r moves with it. Treat this the way Damodaran's own industry data is meant to be used — as a cross-sectional comparison to spot what looks cheap or expensive relative to peers, not a precise number for any single company.