The Capital Asset Pricing Model, or CAPM, estimates cost of equity based on the risk of the broader market and the company’s sensitivity to that market. The standard formula is: Cost of Equity = Risk-Free Rate + Levered Beta × Equity Risk Premium.
The risk-free rate represents the expected return on an investment with minimal default risk. In practice, analysts generally use the yield on a long-term government bond whose currency matches the company’s projected cash flows.