TeleNyckel, Inc. has a beta of 1.4 and is trying to calculate its cost of equity capital. If the risk-free rate of return is 9 percent and the market risk premium is 5 percent, then what is the firm's after-tax cost of equity capital if the firm's marginal tax rate is 30 percent?

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Quizplus · Accepted Answer

The cost of equity capital is calculated using the Capital Asset Pricing Model (CAPM): Cost of Equity = Risk-Free Rate + Beta * Market Risk Premium. Here, it is 9% + 1.4 * 5% = 16%. The tax rate does not affect the cost of equity calculation.