The price of fairness may be calculated utilizing two totally different approaches: the dividend yield plus development price method, and the Safety Market Line (SML) mannequin. For the dividend yield plus development price method, you would wish to calculate the corporate’s anticipated dividend per share for subsequent 12 months, then divide it by the present market worth of the inventory. You’ll then add this determine to an estimated development price for dividends over time with a view to arrive at the price of fairness.
To calculate it utilizing SML mannequin, you should first decide a goal beta on your group primarily based on comparable publicly traded corporations; then multiply that by the danger free return along with including in a threat premium which is decided from empirical knowledge about public corporations. The sum of those three figures is your group’s price of fairness.