Haulsee Inc. pays no dividend currently but is expected to start paying a small dividend next year. The 5-year-old firm has a beta of 1.25 and current earnings of $0.90 per share. The current Treasury bill rate is 6.10%, and the market risk premium is 8.8%. Determine Haulsee's cost of equity if the firm's tax rate is 40%.

Question

Quizplus · Accepted Answer

The cost of equity for Haulsee Inc. can be calculated using the Capital Asset Pricing Model (CAPM), which is given by the formula: Cost of Equity = Risk-Free Rate + Beta * (Market Risk Premium). Plugging in the values: 6.10% + 1.25 * 8.8% = 6.10% + 11% = 17.1%. The firm's tax rate is not needed for this calculation, and dividends are not relevant for the CAPM formula.