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A stock has a realized return of 8% and an expected return of 12%. Treasury bonds...

A stock has a realized return of 8% and an expected return of 12%. Treasury bonds are currently returning 3% while the S&P is returning 11%. The stock is expected to pay a dividend of $5 and has an estimated beta of 1.2. What is the after-tax cost of this firm’s equity if the firm has a tax rate of 40%?

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Answer #1

cost of equity = risk free rate + (beta * (market return - risk free rate))

cost of equity = 3% + (1.2 * (11% - 3%))

cost of equity = 12.60%

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