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 6.1% and the market risk premium is 8.8%. Determine Haulsee's cost of equity from retained earnings if the firm's tax rate is 40%.

Question

Quizplus · Accepted Answer

The cost of equity can be calculated using the Capital Asset Pricing Model (CAPM): Cost of Equity = Risk-free rate + Beta * Market Risk Premium = 6.1% + 1.25 * 8.8% = 17.1%. The tax rate is not needed for this calculation.