Last years, mergers and acquisitions activity is increased in Baltic region. Mainly, it is the result of significant interest of foreign investors to Baltic security market. In Latvia this interest is being notices especially in banking sector. As a result, the problem of bank valuation becomes even more actual and, thus, also the calculation of cost of the capital (discount rate). The purpose of the paper is to examine the traditional techniques used for calculation of cost of equity capital, the problems of its application in Latvian market and to present the modified methods of determination of discount rate for commercial bank’s valuation in Latvia. The publication includes description of Capital Assets Pricing Method and method of cumulative construction. The authors suggest recommendations for CAPM adaptation to Latvian market conditions and the model of risk premiums evaluation for the Latvian commercial banks.