Which of the two should I use?

Use both and treat the gap as the answer's width. A single cost of equity presented to two decimal places is a false precision on a quantity nobody can observe; a range of 7 % to 9 % is an honest one. If a decision flips between those two figures, the decision was never really about the cost of equity.

What counts as the risk-free rate?

By convention, a long government bond yield in the currency of the cash flows, with a maturity close to the horizon being valued. The convention matters more than the theory: what makes a rate usable here is that everyone comparing your figure uses the same one. Mixing a euro risk-free rate with dollar cash flows is the common error, and it shifts the answer by whatever the interest-rate differential happens to be.

Two Accepted Models, Two Points Apart on the Same Company

Published 9/21/2026 · 3 min read · Finance calculators

Camille Laurent — Finance writer at OneKitly

Tax · Personal finance

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In short

Take a risk-free rate of 3 %, a beta of 1.2, an expected market return of 8 %, a dividend of 2 on a price of 50 and dividend growth of 3 %. CAPM says 3 + 1.2 × (8 − 3) = 9 %. The dividend growth model says 2 ÷ 50 + 3 % = 7 %. Both are standard, both are taught, and they disagree by two percentage points on the same company at the same moment. Neither is wrong: they are answering slightly different questions. CAPM asks what return the market demands for bearing this share's exposure to market risk. The dividend model asks what return the current price implies, given what the company actually pays out. When they diverge, the gap is information — it usually means the market price embeds a growth expectation different from the one you typed.

CAPM and the dividend growth model both compute the cost of equity. On one set of inputs they give 9 % and 7 % — and the choice between them decides a valuation more than any figure inside either.

Beta is a measurement, and a fragile one

Beta is estimated by regressing a share's returns on the market's, and the answer depends on choices nobody standardises: how far back the window goes, whether the returns are daily, weekly or monthly, and which index stands for the market. The same share can come out at 1.0 on one convention and 1.4 on another, which on the numbers above is a full two points of cost of equity. When a valuation turns on a beta, it is worth asking where the beta came from before arguing about anything else.

When the dividend model simply does not apply

It needs a dividend, and a growth rate below the cost of equity. A company paying nothing has a dividend yield of zero and the model collapses to the growth rate alone, which is meaningless. A company whose assumed growth exceeds its cost of equity produces a negative denominator elsewhere in the same family of formulas and an answer that is worse than meaningless. CAPM has neither constraint, which is most of why it survives in practice — not because it is more accurate, but because it always returns something.

The same company, both models
Model	Built from	Cost of equity
CAPM	risk-free + beta × market premium	9 %
Dividend growth	dividend ÷ price + growth	7 %

Worked with our own calculator

Cost of equity calculator (CAPM & DDM)

Given

Risk-free rate (%): 4.5
Beta (β): 1.15
Expected market return (%): 10
Expected dividend D₁: $3.50
Current stock price P₀: $145.00
Dividend growth rate g (%): 5

Result

Cost of equity — CAPM: 10.82%
Cost of equity — DDM: 7.41%

These figures are produced by the calculator below, not typed in by hand — they are recomputed whenever the tool changes.

Run it on your own figures →

Frequently asked questions

Which of the two should I use?: Use both and treat the gap as the answer's width. A single cost of equity presented to two decimal places is a false precision on a quantity nobody can observe; a range of 7 % to 9 % is an honest one. If a decision flips between those two figures, the decision was never really about the cost of equity.
What counts as the risk-free rate?: By convention, a long government bond yield in the currency of the cash flows, with a maturity close to the horizon being valued. The convention matters more than the theory: what makes a rate usable here is that everyone comparing your figure uses the same one. Mixing a euro risk-free rate with dollar cash flows is the common error, and it shifts the answer by whatever the interest-rate differential happens to be.

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Sources

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