Equity Premium Calculator

Equity Premium Calculator: calculate equity premium for your business. Formula, benchmarks, and practical tips included.

The equity risk premium (ERP) is the excess return that investors demand for holding equities over and above a risk-free investment. It is a foundational input in the CAPM model for estimating cost of equity: Cost of equity = Risk-free rate + Beta × ERP. The ERP is not directly observable — it must be estimated from historical data or implied by current market prices — and it varies over time with investor risk appetite, economic conditions, and market valuation levels. Damodaran's annually updated ERP dataset is the most widely cited academic source. Profit Margin Calculator is where ERP feeds into the full cost of equity and WACC calculation.

Historical ERP: calculate the average annual excess return of equities over government bonds over a long historical period (typically 50–100 years).
Implied ERP: solve for the ERP implied by current market prices, dividend yields, and expected growth rates in a DDM or FCF model.
Survey-based ERP: use consensus estimates from academic surveys (Fernandez survey; Damodaran's annual estimate).
Apply ERP as: Cost of equity = Risk-free rate + Beta × ERP.

Equity risk premium in CAPM

Cost of equity = Rf + β × ERP

Historical ERP: United States — approximately 4.5–5.5% above 10-year treasury yields over long run (Damodaran, 2024). United Kingdom — approximately 4.0–5.0%. Developed markets average — approximately 4.0–5.0%. Emerging markets — add 1–5% country risk premium on top of base ERP depending on sovereign risk.

Worked example: Risk-free rate 4.2%. Beta 1.2. ERP 5.0%. Cost of equity = 4.2% + 1.2 × 5.0% = 10.2%.

ERP estimates by market (2024)

Current implied ERP ranges

Damodaran's January 2024 ERP estimates: US implied ERP approximately 4.6%; UK approximately 5.2%; Germany approximately 5.5%; Japan approximately 5.8%; Brazil approximately 8.5%; India approximately 7.2%; China approximately 8.8%. Country risk premiums are additive to the base ERP and reflect sovereign default risk, political risk, and currency risk. For cross-border investment valuation, the correct ERP is the local country ERP, not the home market ERP.

Business tips and best practices

Use the implied ERP from current market prices rather than historical averages when current market conditions differ significantly from historical averages.
Damodaran's website (pages.stern.nyu.edu/~adamodar) provides free annual ERP updates by country — the industry standard starting point for WACC calculations.
For private company cost of equity, add a size premium of 2–5% to CAPM estimates — small companies carry additional liquidity and idiosyncratic risk not captured in beta.

See formula and results sections for key figures and benchmarks.

Common mistakes to avoid

See tips section for common pitfalls to avoid.

Equity risk premium estimates used in regulated proceedings (utility rate-setting, M&A fairness opinions, court-ordered valuations) are subject to expert scrutiny and must be supportable under applicable legal standards. For investment advice, ERP assumptions must be disclosed and supported. This calculator is for educational purposes only.