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The cost of equity can be a difficult concept simply because it's a subjective number. The number is based on the prevailing risk-free rate (i.e. 10 year treasury) plus an estimated risk premium. The risk premium is the estimate. The higher the perceived risk, the bigger the premium (which is why many use a higher risk premium for small caps relative to large caps). In estimating the cost of equity, past earnings may be one of many factors used to determine a company's possible risk. Although it certainly could be argued that a company which demonstrates consisent earnings growth would lead to a lower risk premium, whereas a company with a highly inconsistent history should garner a larger risk premium, and therefore higher cost of equity.

It's useful to remember that the cost of equity or discount rate is simply a hurdle rate needed to be surpassed in order to achieve economic profitable (enterprising profits). Reading Hewitt's book will definetly help clarify these concepts.
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