Jacque Ewing Drilling, Inc. has a beta of 1.3.. If the risk-free rate of return is 8 percent and the expected return on the market is 12 percent, then what is the firm's after-tax cost of equity capital if the firm's marginal tax rate is 40 percent?
A) 7.92%
B) 13.20%
C) 15.57%
D) 23.60%

Question

Quizplus · Accepted Answer

The after-tax cost of equity capital for Jacque Ewing Drilling, 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 Return - Risk-Free Rate). Plugging in the values: Cost of Equity = 8% + 1.3 * (12% - 8%) = 8% + 1.3 * 4% = 8% + 5.2% = 13.2%. The firm's marginal tax rate does not affect the cost of equity since dividends and capital gains are paid from after-tax income, hence the after-tax cost of equity remains the same as the pre-tax cost of equity.