What does it mean by the Cost of equity? Is it the cost to issue the equity, or the cost forgone by issuing of the equity? I can’t grasp the logic behind the word “cost”. Can someone clarify this a bit?
It’s the shareholder’s required return on invested capital.
Look at it from the perspective of the firm that is issuing the equity. Common-stockholders buy your company stocks; so you need to compensate them for investing in your firm and bearing all sorts of …bla…bla…bla… risks. So isn’t it a cost to the firm? - Dinesh S
LOL, well said dinesh
You could also look at it as purely the risk associated with the equity, in terms of understanding. This is why debt is cheaper than equity, debtholders have first dibs, then preferred shareholders, then common equity/stock owners. Vonage’s cost of equity will be much higher than a General Electric.
Like everyone else said and to add… It’s basically the incentive to buy company stock. You could just invest your money in a risk-free treasury bond for wahtever %…so obviously the company would have to give you a higher percentage return since if you bought their stock you would be taking on risks/more risks