# Cost of Equity

Cost of Equity = expected return (share price change + dividend)

But: A company doesn’t need to pay the share price difference. Thus this is not a “cost”.

Why do we put the share price development in the Cost of Equity (for WACC) instead of only the dividend?

They don’t need to pay the dividend, either.

The cost of the share price increase is the company’s need to generate profits.

What the company is actually paying are the dividends on a share of common stock out to an infinite time frame.

But the dividends represents a growing perpetuity (at least for a constant dividend growth stock). If you’ve done the valuation reading, you know that the price of a share of common for a constant-growth stock is P = D(1)/(r-g) (i.e. it’s the PV of a growing perpetuity).

With a bit of rearranging, you get r = D(1)/§ + g, with g being the growth rate in dividends each year.

Since the price is the next period’s dividend divided by (r-g), if the dividend grows at a rate of “g”. so will the stock’s price.

So the cost of equity will be the dividend yield (D(1)/P(0) PLUS the % change in stock price.