The cost of equity: RadicalVenOil, Inc., has a cost of equity capital equal to 22.8 percent. If the risk-free rate of return is 10 percent and the expected return on the market is 18 percent, then what is the firm's beta if the firm's marginal tax rate is 35 percent?

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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 Return - Risk-Free Rate). Rearranging to solve for Beta: Beta = (Cost of Equity - Risk-Free Rate) / (Market Return - Risk-Free Rate). Substituting the given values: Beta = (22.8% - 10%) / (18% - 10%) = 1.60. The tax rate is irrelevant in this calculation.

The Cost of Equity: RadicalVenOil, Inc