Estimating the Expected Cost of Equity Capital Usind Analysts’ Consensus Forecasts

In this study, we develop a technique for estimating a firm’s expected cost of equity capital derived from its stock price and analysts’ consensus earnings forecasts. Our estimation method, which is based on the residual income valuation model, extends and refines currently available approaches by explicitly allowing daily estimation and using only publicly available information at that estimation date. We apply this technique to estimate the expected cost of equity capital at the market, industry and individual firm level, using historical German data from 1989-2002, and to examine firm characteristics that have been systematically related to these estimated return expectations.