In the capital assets pricing model, the cost of equity is investors' required return and includes
1) the expected return on the market
2) the firm's beta
3) the firm's tax rate
A)1 and 2
B)1 and 3
C)2 and 3
D)1, 2, and 3

Question

In the capital assets pricing model, the cost of equity is investors' required return and includes​
1) the expected return on the market
2) the firm's beta
3) the firm's tax rate
A)​1 and 2
B)1 and 3​
C)2 and 3​
D)1, 2, and 3​

Quizplus · Accepted Answer

The cost of equity in the capital assets pricing model is calculated as the expected return on the market plus a premium for the firm's risk (beta). The tax rate is not a factor in this calculation. Therefore, the best choice is A, which includes only 1 and 2.

In the Capital Assets Pricing Model, the Cost of Equity