Cost of Equity in Australia: 2025 Guide for Investors & Businesses

The cost of equity isn’t just a textbook concept—it’s a driving force behind how Australian companies raise capital and how investors judge risk and reward. In 2025, with interest rates stabilising after years of volatility and ASX-listed companies facing new reporting standards, understanding cost of equity is more important than ever for both investors and business owners.

What Is Cost of Equity and Why Does It Matter?

Simply put, the cost of equity is the return a company must offer investors to compensate for the risk of owning its shares. Unlike debt, which demands regular interest payments, equity doesn’t require fixed repayments—but shareholders expect a competitive return for taking on higher risk.

• For investors: The cost of equity is a benchmark for evaluating whether a stock offers enough potential reward for its risk.

• For companies: It’s the minimum return they need to generate on new projects to attract or retain shareholders.

In Australia, the cost of equity is front and centre in everything from discounted cash flow (DCF) valuations to calculating the weighted average cost of capital (WACC) for project appraisals. With the ASX seeing a surge in capital raisings in 2025, boards are under pressure to justify their equity costs to both retail and institutional investors.

How Do You Calculate Cost of Equity in 2025?

There’s no single formula, but the most common approach is the Capital Asset Pricing Model (CAPM). CAPM factors in the current risk-free rate (usually the yield on Australian government bonds), the stock’s sensitivity to market movements (its beta), and the expected market risk premium.

CAPM Formula:

Cost of Equity = Risk-Free Rate + Beta × (Market Return – Risk-Free Rate)

Key 2025 updates for Australian calculations:

• Risk-free rate: The 10-year Australian Government bond yield has stabilised around 3.5% in 2025, following RBA policy tightening in previous years.

• Market risk premium: Most Australian analysts are using a market risk premium between 5% and 6% in 2025, reflecting higher global uncertainty and inflation expectations.

• Beta: ASX-listed companies are recalibrating beta estimates due to post-pandemic volatility, with sectors like tech showing higher betas than traditional industries such as mining or banking.

Example: Suppose a listed Australian fintech has a beta of 1.4. With a 3.5% risk-free rate and a 5.5% market risk premium, its cost of equity would be:

3.5% + 1.4 × (5.5%) = 3.5% + 7.7% = 11.2%

That means new projects or investments by this company need to deliver at least an 11.2% expected return to make sense for shareholders.

Real-World Impacts: Why Cost of Equity Is More Than a Number

The cost of equity plays a pivotal role in how Australian businesses make strategic choices and how investors weigh up their portfolios:

• Capital Raising: In 2025, ASX companies raising new equity must demonstrate value to investors who are acutely aware of rising cost-of-equity expectations. Businesses with lower perceived risk (and thus lower cost of equity) can often raise funds on better terms.

• Valuation and M&A: When valuing companies or targets for mergers and acquisitions, the chosen cost of equity significantly influences valuation outcomes. A higher cost of equity results in a lower company valuation, all else equal.

• Dividend Policies: Boards are aligning dividend strategies with their cost of equity, seeking to offer yields that meet or exceed this hurdle to maintain investor confidence—especially as term deposit rates have climbed post-2024.

• ESG and Risk Adjustments: With 2025’s stronger ESG disclosure requirements, companies with robust environmental and governance practices may achieve lower betas—and thus a reduced cost of equity—as investors see them as safer long-term bets.

Case in Point: In early 2025, a major Australian energy retailer announced a new solar infrastructure project, explicitly citing a lower cost of equity due to improved ESG metrics and a strong balance sheet. This enabled them to outbid competitors for capital and deliver more attractive returns to shareholders.

2025 Trends: How Policy and Market Shifts Influence Cost of Equity

This year, several forces are shaping the way the cost of equity is determined and applied in Australia:

• RBA Policy: With the Reserve Bank of Australia holding rates steady after a turbulent period, risk-free rates are less volatile, but inflation expectations still drive up required returns.

• ASX Disclosure Standards: New 2025 ASX listing rules require more granular risk reporting, giving investors greater transparency and improving beta estimates.

• Global Uncertainty: Ongoing geopolitical tensions and shifts in commodity markets are making Australian investors more sensitive to risk premiums, particularly in sectors exposed to global supply chains.

For both companies and investors, regularly revisiting cost-of-equity assumptions is now essential to stay competitive and make informed decisions.