Cost of equity is the return a firm theoretically pays to its equity investors. Capital Asset Pricing Model (CAPM) is the most commonly used method of determining the appropriate cost of equity. According to CAPM:

Cost of Equity, Re = Rf + b (Rm-Rf), where;

Re = Cost of Equity

Rf = Risk-free rate of return

Rm = The historical return of the stock market / equity market

b = is a number describing the correlated volatility of an asset in relation to the volatility of the benchmark that said asset is being compared to.