A risk premium that is estimated from a company’s total market capitalization, amount of earnings and reinvestment, and future earnings growth. It represents the product of the implied market equity risk and an asset beta. Differently stated, market-implied risk premium is the difference between the expected total yield on an equity investment (the internal rate of return) and the yield on a comparatively risk-free asset.

The dividend discount model (Gordon growth model) provides a basic one-stage valuation methodology that may be used to figure out the cost of equity. To that end, a distributed yield is usually used instead of a reinvestment rate so that both market earnings and capitalization can be dropped. On the other hand, long-term sustainable growth rates may be calculated as the product of return on equity and retention ratio of returns on equity and reinvestment rates.

The market-implied risk premium is a measure of market-implied excess return.