# CMA Study Group

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## cost of equity

• #### 1.  cost of equity

Posted 23 days ago
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 23 days ago

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 23 days ago
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 23 days ago
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 23 days ago
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 23 days ago
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 23 days ago
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 23 days ago
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 23 days ago
Thank you very much Craig

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Syed Yousuf Jamal
None
Alexandria
Egypt
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