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.

Enter expected market return and risk-free rate for the same currency and period; nominal ERP = market return − risk-free rate.
Enter the stock beta to calculate its expected return: risk-free rate + beta × nominal ERP.
Enter matching-period inflation to see real ERP: nominal ERP ÷ (1 + inflation rate / 100). Inflation must be above −100%.
Use historical, implied, or survey-based ERP estimates as starting assumptions, and identify their source and date.

Equity risk premium in CAPM

Nominal ERP = Market return − Risk-free rate

Real ERP = Nominal ERP ÷ (1 + inflation rate / 100)

Expected stock return = Risk-free rate + β × Nominal ERP

Worked example: Market return 10.5%, risk-free rate 4.5%, and inflation 2.5%. Nominal ERP = 10.5% − 4.5% = 6.0%. Real ERP = 6.0% ÷ 1.025 = 5.8537% (about 5.85%).

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.

ERP estimates by market (2024 snapshot)

Historical estimates—not live market data

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%. These dated estimates are historical references, not current inputs; verify the latest country estimates before using them. Country risk premiums reflect sovereign default risk, political risk, and currency risk. For cross-border valuation, use an ERP consistent with the cash-flow currency and country risk.

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.