CMA Study Group

cost of equity

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  • 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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