Question

Terex company has a beta of 1.7 and is trying to calculate its cost of equity capital. If the risk-free rate of return is 5 percent and the average market return 16 percent, then what is the firm's after-tax cost of equity capital if the firm's marginal tax rate is 30 percent? Select one: a. 23.7 % b. 22.5 % c. None of these d. 22.8 %

Answer 1

c. None of these

Step-by-step explanation:

According to the scenario, computation of the given data are as follows,

Company Beta = 1.7

Risk free rate = 5%

Average market return = 16%

Marginal tax rate = 30%

So, we can calculate the after tax cost of equity by using following formula,

Cost of equity = Risk free Rate + company beta × Average market return

Cost of equity = 5% + (1.7 × 16%)

= 5% + 27.2%

= 32.2%