LOS i: Compare and contrast a company's cost of equity, its (accounting) return on equity, and investors' required rates of return.

When book values are not stable, analysts should calculate ROE based on the average book value for the period. When book values are more stable, beginning book value is appropriate.

The ratio of the firm’s net income to its average book value is the firm’s return on equity, which can be greater than, equal to, or less than the firm’s cost of equity. Cost of equity for a firm can be defined as the expected equilibrium total return in the market on its equity shares, or as minimum rate of return that investors require as compensation for the risk of the firm’s equity securities.