CMA Study Group

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  • 1.  cost of equity

    Posted 11-18-2019 10:12 PM
    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% and the market risk premium is 5%, then what is the firm's after-tax cost of equity capital if the firm's marginal tax rate is 30%?

    11.20%

    12.60%

    7.00%

    16.00%

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    Syed Yousuf Jamal

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  • 2.  RE: cost of equity
    Best Answer

    Posted 11-19-2019 01:56 AM

    16%


    cost of equity= risk free rate+beta*risk premium
    where risk premium = market rate - risk free rate. 


    putting the values in the formula, we get

    cost of equity= .09+1.4*.05= .16 or 16%



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    Sunil Divakaran
    Accountant
    DUBAI
    United Arab Emirates
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  • 3.  RE: cost of equity

    Posted 11-19-2019 02:00 AM
    Cost of Equity = Risk Free Return + Beta X Risk Premium=  9 + (1.4 X 5) = 16%


    16.00%

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    Mathew John
    Supervisor
    Al Maha Petroleum Products Marketing Co SAOG
    Not Specified
    Oman
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  • 4.  RE: cost of equity

    Posted 11-19-2019 02:15 AM
    16
    RRR=risk free rate+beta(market rate_risk free rate)
    Market risk premium =market risk_risk free rate)
    Thus RRR=9+1.4*(5)=16
    We don't use the marginal tax because cost of equity not tax deductible. Just bond is tax deductible. 





  • 5.  RE: cost of equity

    Posted 11-19-2019 05:38 AM
    Should be 16%

    (1.4 * .o5) +.09

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    Craig Calvert
    Analyst
    Brandenburg KY
    United States
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  • 6.  RE: cost of equity

    Posted 11-19-2019 08:21 AM
    CAPM= Risk free + B (Market Rate-Risk-free rate)
               = 9%+1.4 x 5%
               = 16% . There is no such concept of after tax -cost of Equity

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    Seema Chaudhary
    Accountant
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  • 7.  RE: cost of equity

    Posted 11-19-2019 12:17 PM
    thanks a lot guys for your prompt response, I have doubt here when we use RF+B(RM-RF) what is the difference here.

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    Syed Yousuf Jamal
    None
    Alexandria
    Egypt
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  • 8.  RE: cost of equity

    Posted 11-19-2019 01:06 PM
    Market risk minus Risk free rate equals the market risk premium. Market risk premium is given to you in the question so you do not have to calculate

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    Craig Calvert
    Analyst
    Brandenburg KY
    United States
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  • 9.  RE: cost of equity

    Posted 11-19-2019 01:21 PM
    Thank you very much Craig

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    Syed Yousuf Jamal
    None
    Alexandria
    Egypt
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