The return required by equity investors as compensation for owning shares in a company, representing the opportunity cost of equity capital. It reflects the risk-free rate plus a premium for the additional risk of owning stock.
Formalized with the development of the Capital Asset Pricing Model in the 1960s, building on earlier portfolio theory. The concept evolved from the basic principle that riskier investments must offer higher expected returns to attract capital.
Cost of equity is invisible but incredibly powerful - it's the silent expectation in every shareholder's mind about what return justifies the risk of owning the stock! Unlike debt, there's no contract specifying this rate, yet it drives every major corporate decision from dividends to acquisitions.
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