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#cfa-level-1 #corporate-finance #reading-36-cost-of-capital #taxes-and-cc
There are several methods available for estimating the cost of common equity, and we discuss two in this reading. The first method uses the capital asset pricing model, and the second method uses the dividend discount model, which is based on discounted cash flows. No matter the method, there is no need to make any adjustment in the cost of equity for taxes because the payments to owners, whether in the form of dividends or the return on capital, are not tax-deductible for the company.
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2.1. Taxes and the Cost of Capital
l on the borrowing. Equity entails no such obligation. Estimating the cost of conventional preferred equity is rather straightforward because the dividend is generally stated and fixed, but estimating the cost of common equity is challenging. <span>There are several methods available for estimating the cost of common equity, and we discuss two in this reading. The first method uses the capital asset pricing model, and the second method uses the dividend discount model, which is based on discounted cash flows. No matter the method, there is no need to make any adjustment in the cost of equity for taxes because the payments to owners, whether in the form of dividends or the return on capital, are not tax-deductible for the company. <span><body><html>


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