# Cost of Equity: Understand how to calculate Return on Investment in one sentence.

Want to know if buying this stock is worthwhile? The key lies in the **Return on Investment** — simply put, it's the minimum return rate you should expect from investing in this company.

# # Which of the two algorithms is better to use?

**CAPM (Capital Asset Pricing Model)** — Most commonly used
Formula: **Return = Risk-free return + β value × ( market return - Risk-free return )**

For example: the yield on government bonds is 2%, the market average yield is 8%, and the volatility of a certain stock is 1.5 times that of the market.
So → 2% + 1.5×(8%-2%) = **11%**
It means: This stock needs to rise by 11% to be worth the risk of buying.

**DDM (Dividend Discount Model)** — Suitable for dividend stocks
Formula: **Return = ( annual dividend / stock price ) + dividend growth rate**

For example: Stock price is 50, annual dividend is 2, with a 4% annual increase in dividends.
So → (2÷50) + 4% = **8%**

# # Why do we need to calculate this?

For **investors**: A quick assessment of whether it is worth buying; the higher the yield, the greater the risk or the more undervalued it is.

For **companies**: Know the minimum return required by shareholders to guide investment decisions—if the expected return on a new project is below this number, don't do anything.

# # Quick comparison: cost of equity vs cost of debt

The cost of equity is usually higher because shareholders face greater risks (they lose everything if there are no dividends); the cost of debt is lower but must be repaid with interest. A smart financing method is to combine both.

**Core Packaging:** The lower the cost-return ratio = the more investors trust you = the easier the financing.