CAPM Calculator (Cost of Equity)
Capital Asset Pricing Model calculator. Computes the required return on equity (cost of equity) from risk-free rate, expected market return, and asset beta. Foundation of corporate finance.
CAPM Calculator — Cost of Equity
How to use the CAPM calculator
Enter the risk-free rate (Rf)
The yield on a "riskless" sovereign bond matching your valuation horizon. For US equity valuation: 10-year US Treasury yield (~4.5% mid-2026). For shorter cash flows: 3-month or 2-year T-bill. For non-US valuations: matching-tenor local sovereign yield (UK gilt, German Bund, JGB, MAS T-bill for SGD). The Rf anchors the entire CAPM line — get this wrong and every cost of equity below is wrong.
Enter the expected market return (Rm)
The expected return on a broad market index over your horizon. Two methods: (1) Historical average — long-run US equity return ~9-10% nominal since 1928. (2) Forward-looking — earnings yield + expected real GDP growth + expected inflation ≈ current 10-yr Damodaran estimate of ~8-9%. Most CFA-style valuations use 8-10%. Don't use individual-year returns; the noise dwarfs the signal.
Enter the asset's beta (β)
Beta = covariance(asset, market) / variance(market). Sources: Bloomberg / Refinitiv for institutional. Yahoo Finance / Stock Analysis / Stooq for retail (typically 5-year monthly beta). Damodaran's data archive for industry-average betas (preferred for private-company valuation). Levered vs unlevered beta matters: published "raw" betas are levered to the company's current capital structure — unlever and re-lever for like-for-like comparisons.
Read the cost of equity (re)
The headline number is the required return on equity — i.e. what equity investors demand to compensate for the risk of holding this asset. This is the discount rate used for cash flows accruing to equity holders (FCFE-based valuation) and the equity component of WACC for firm-level cash flows (FCFF-based). Higher re = higher discount rate = lower valuation, all else equal.
Feed into WACC and DCF
Cost of equity is one of two ingredients in WACC (Weighted Average Cost of Capital — see RT-FIN-222). WACC then becomes the discount rate in DCF valuation (RT-FIN-221). Each tool feeds the next: CAPM → cost of equity → WACC → DCF discount rate. If your DCF is sensitive to small WACC changes, sensitivity tables on the three CAPM inputs reveal how robust your valuation is.
CAPM — the Nobel-winning equation behind every cost of equity on earth
The Capital Asset Pricing Model, published by William Sharpe in 1964 (and independently by John Lintner and Jan Mossin), prices the trade-off between risk and return for any financial asset. Its central equation — re = Rf + β · (Rm − Rf) — says that an asset's expected return is the risk-free rate plus a risk premium scaled by how much the asset's returns covary with the market. Sharpe shared the 1990 Nobel Prize in Economics for the work. Despite many empirical challenges (the Fama-French three-factor and five-factor models, the Q-factor model, the Stambaugh-Yuan four-factor model — all extend or critique it), CAPM remains the workhorse cost-of-equity model in every MBA finance class, every CFA Level 1/2/3 reading, every corporate finance textbook, and every investment bank's DCF spreadsheet.
Why CAPM dominates despite its empirical failures
Three reasons. (1) Simplicity — three inputs, one equation, defensible at a board meeting in 30 seconds. (2) Defensibility — when comp-set analysis or transaction multiples disagree with your DCF, CAPM gives you the language to argue the discount rate. (3) Regulatory acceptance — utility regulators in the US (FERC), UK (Ofgem, Ofwat), Australia (AER), and Singapore (EMA for power tariffs) all use CAPM-based "allowed return on equity" calculations. The Fama-French models are empirically better at explaining cross-sectional stock returns but rarely show up in regulatory filings or board-pack valuations. CAPM is the language of corporate finance practice — even if academics have moved past it.
Beta is the most-cited financial number that almost nobody computes from scratch. Most analysts pull beta from Bloomberg, Yahoo, or Damodaran — but rarely re-estimate it, never re-lever it, and almost never sensitivity-test it.
Beta — the input that breaks people the most
Beta is the slope of a regression of an asset's returns on market returns. Published "raw" betas have hidden choices baked in: (1) Frequency — daily, weekly, monthly returns. Bloomberg defaults to weekly over 2 years; Yahoo defaults to monthly over 5 years. They produce different numbers. (2) Index — S&P 500 vs Russell 3000 vs MSCI World. Different proxies for "the market" give different betas. (3) Adjusted vs raw — Bloomberg's "adjusted beta" applies Blume's adjustment: βadj = 0.33 + 0.67 · βraw (regressing all betas toward 1 over time). (4) Levered vs unlevered — levered beta reflects the current debt-equity ratio. To value a target with a different capital structure, you must unlever the comparable's beta (βU = βL / (1 + (1−T)·D/E)) then re-lever to your target structure.
ASEAN-specific considerations
For valuing Singapore-listed companies: use the 10-year SGS bond yield as Rf (~3.0% mid-2026), STI as the market proxy (Rm typically 7-9% for SG equity), and beta from regression on STI returns. For Malaysia (Bursa Malaysia): 10-year MGS yield as Rf (~3.8%), KLCI as market proxy. For Indonesia (IDX): 10-year government bond yield (~6.5-7.0% reflecting EM risk premium) and IDX Composite. Don't naively apply US CAPM inputs to ASEAN valuations — country risk premiums materially shift Rf and Rm. Damodaran publishes country risk premiums annually for 145+ countries; check his site (pages.stern.nyu.edu/~adamodar/) for current ASEAN-specific Rm estimates.
10 Things to Know About CAPM
Published 1964 by William Sharpe in Journal of Finance. Lintner (1965) and Mossin (1966) developed similar models independently. Markowitz's 1952 portfolio theory was the foundation.
1990 Nobel Prize in Economics to Sharpe (jointly with Markowitz + Miller). CAPM made modern finance possible as an academic discipline.
β = 1.0 means market. S&P 500 ETF has β ≈ 1.0 by construction. AAPL beta ≈ 1.2-1.3; KO (Coca-Cola) ≈ 0.5-0.7; high-beta growth stocks ≈ 1.5-2.5.
Long-run US equity risk premium ≈ 5-7% (Damodaran annual surveys). The ERP shrinks during low-rate eras and expands during stress.
Bloomberg's "adjusted beta" applies Blume's adjustment: βadj = 0.33 + 0.67 · βraw. Regresses all betas toward 1 over time — controversial.
Levered vs unlevered beta matters. Published betas reflect current debt-equity. To compare or transfer betas across companies, unlever then re-lever to target structure.
Fama-French (1992) showed CAPM under-explains stock returns — size and value factors matter. Their 3-factor + 5-factor models are academic standards.
Utility regulators worldwide (FERC, Ofgem, Ofwat, AER, EMA) set "allowed return on equity" using CAPM-derived costs of equity. Practical staying power.
CAPM is one-period. The original model is single-period — long-horizon DCF applies it tacitly assuming a constant cost of equity, which is a simplification.
Country risk premiums: add a CRP to Rm for emerging-market valuations. Damodaran publishes CRPs for 145+ countries annually. Critical for ASEAN, LatAm, EM Asia.
Frequently asked questions
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Free sources: Yahoo Finance ("Statistics" → 5-year monthly beta), Stock Analysis, Stooq, WSJ. Free industry betas: Damodaran's data archive (pages.stern.nyu.edu/~adamodar/). Paid: Bloomberg (BETA command), Refinitiv Eikon, FactSet. For private-company valuation, use Damodaran's industry-average unlevered beta, then re-lever to your target capital structure. For valuing comps within a single industry, use a peer-group median unlevered beta and re-lever.
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For US equity: 8-10% nominal is the consensus range. Two methods: (1) Historical — long-run S&P 500 nominal return since 1928 ≈ 9.5%. (2) Implied — Damodaran's monthly implied ERP estimate (current ~4.5-5.5%) plus the 10-yr Treasury yield (~4.5%) gives Rm ~9-10%. For ASEAN: add a country risk premium of 1-3% for EM markets. For developed Europe and Japan: 7-9% Rm is typical (lower nominal growth + lower terminal risk-free).
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Three likely causes. (1) Stale beta — your beta may reflect a different growth phase. Check the regression window. (2) Different leverage — comparable's published beta reflects their capital structure; unlever and re-lever to like-for-like. (3) Different Rf or Rm — if comparison is from a year ago, rates have moved. Re-run the comparable with current Rf and Rm. For early-stage companies, CAPM may understate the true cost of equity — the market beta doesn't capture idiosyncratic execution risk. Many practitioners add a 2-5% small-cap or size premium for sub-$500M market cap.
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Levered beta reflects the company's current capital structure (debt + equity). It's what you read from Bloomberg/Yahoo. Use it directly if you're computing the cost of equity for a company at its current capital structure. Unlevered (asset) beta strips out the leverage effect. Use it when (a) valuing a private company by reference to listed comps with different leverage, (b) modelling a target's value at a post-deal capital structure that differs from today's, (c) comparing betas across industries with structurally different leverage profiles. The unlever / re-lever formula: βU = βL / (1 + (1−T) · D/E), then βL,target = βU · (1 + (1−T) · D/E)target.
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For small-cap and micro-cap valuations, many practitioners extend CAPM with a size premium: re = Rf + β · MRP + SP. Duff & Phelps (now Kroll) publishes annual size-decile premiums — recent estimates: ~1-2% for $1-5B caps, 2-4% for $250M-$1B, 4-6% for <$250M. For private-company illiquidity, an additional 10-30% discount for lack of marketability (DLOM) is typically applied to the valuation (not the discount rate). For emerging-market sovereign risk, add a country risk premium per Damodaran's annual estimates. This tool computes pure single-factor CAPM — apply these premiums externally.
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Three nested layers: (1) CAPM computes cost of equity (re) — the return equity investors demand. (2) WACC blends re with after-tax cost of debt: WACC = (E/V)·re + (D/V)·rd·(1−T), where V = E + D. (3) DCF uses WACC as the discount rate to convert future free cash flows to firm into present value. CAPM is the foundational layer — get it wrong, WACC is wrong, DCF is wrong. Sensitivity analysis on the three CAPM inputs (Rf ±1%, MRP ±1%, β ±0.2) shows how robust your final valuation is to discount-rate uncertainty.
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Yes — in practice, despite academic critiques. Multi-factor models (Fama-French 3-factor, 5-factor, Carhart 4-factor, q-factor, Stambaugh-Yuan 4-factor) empirically explain cross-sectional stock returns better than CAPM. But they're rarely used in corporate finance because (a) the additional factor premiums are noisy and unstable, (b) board members understand "beta" — they don't understand HML or SMB, (c) regulatory filings, auditor opinions, and fairness opinions universally cite CAPM. For asset-management portfolio construction, multi-factor models dominate. For valuation, M&A advisory, and corporate finance — CAPM still rules.
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A negative re is theoretically incoherent. It means your inputs imply investors would pay to hold this asset rather than demand a return — only possible if β · (Rm − Rf) is more negative than Rf is positive. Three causes: (a) negative beta (rare — gold, some hedge fund strategies, certain volatility-short products), (b) Rm < Rf (you've made an error — by definition, the market commands a positive expected risk premium over the risk-free rate), or (c) you've used very different time horizons for Rf and Rm. Double-check that all three inputs reflect the same forward horizon and currency.
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No. The entire CAPM computation — Rf + β · (Rm − Rf), market risk premium decomposition, beta interpretation — runs in JavaScript in your browser. Open DevTools → Network when you click Compute and you'll see zero outbound requests. Safe for confidential M&A valuation work.
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Sharpe WF. "Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk." Journal of Finance 1964;19(3):425-442. DOI 10.1111/j.1540-6261.1964.tb02865.x. Lintner J. "The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets." Review of Economics and Statistics 1965;47(1):13-37. For textbook treatment: Brealey-Myers-Allen "Principles of Corporate Finance" Chapter 8; Damodaran "Investment Valuation" Chapter 7. For Damodaran's annual ERP updates, see his SSRN papers.
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