The after-tax cost of equity equals one minus the marginal tax rate times the required rate of return on common stock.

Name: The after-tax cost of equity equals one minus the marginal tax rate times the required rate of return on common stock.
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Question

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The after-tax cost of equity does not factor in the marginal tax rate because dividends and capital gains are paid from net income, which is already taxed at the corporate level. Therefore, the cost of equity is not directly affected by the company's tax rate.

The After-Tax Cost of Equity Equals One Minus the Marginal