Cost of equity

The return shareholders require for owning the shares, given the risk they are taking.

Under the capital asset pricing model it's the risk-free rate plus beta times the equity risk premium. At 7%, a beta of 1.1 and a 5.5% premium, the answer is 13.05%.

Nobody can observe this number, and it's worth saying so plainly. It's inferred from a model whose central assumption, that a single measure of covariance captures risk, is contested and has been for fifty years. So why use it? Practitioners do because the alternatives are worse, and because the habit of stating a required return is more valuable than the precision of any particular estimate.

Build it, then sanity-check it against what a lender charges the same company. Equity should cost meaningfully more than debt.