How do you calculate the cost of stock (cost of equity) from P/E?

Question

IBPrep · Accepted Answer

Cost of equity ≈ 1 / P/E (the earnings yield). A company with a P/E of 20x has an earnings yield of 5%, which is its implied cost of equity. This is a quick approximation used in accretion/dilution analyses for stock deals.

How do you calculate the cost of stock (cost of equity) from P/E?

Answer

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