What is the Cost of Equity?

The Cost of Equity represents the return that investors expect from their equity investment in a company, considering the associated risks. This metric is crucial for businesses as it serves as a benchmark for evaluating investment opportunities. Essentially, it reflects the compensation that equity investors require to take on the risk of owning shares in the firm, particularly in comparison to risk-free investments like government bonds.

The Cost of Equity can be estimated using models like the Capital Asset Pricing Model (CAPM), which factors in the risk-free rate, the expected market return, and the stock's beta, which measures its volatility relative to the market. This makes Choice B the most accurate representation of the concept.

The other options do not align with the definition of the Cost of Equity. The profit from stock sales pertains to realized gains, making it unrelated to the required return on equity. The total amount invested in a company deals with capital structure rather than the return demanded by investors. Interest expenses are indicative of debt costs within a capital structure, not equity, reinforcing that the Cost of Equity specifically pertains to equity holders' required returns.