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The cost of equity is broadly defined as the risk-weighted projected return required by investors on a company's equity in order to compensate investors for the risk they undertake. While a firm's current cost of debt is relatively easy to determine from observation of interest rates in the capital markets, its current cost of equity is unobservable and must be estimated. The cost of equity can be estimated by comparing the investment to other investments with similar risk profiles. Estimates are also commonly calculated using the capital asset pricing model (CAPM).
Source: Boundless. “The Cost of Common Equity.” Boundless Finance. Boundless, 21 Jul. 2015. Retrieved 22 Jul. 2015 from https://www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-to-the-cost-of-capital-10/valuing-different-costs-88/the-cost-of-common-equity-377-8725/