How to Use This Calculator
- 1
Enter Your CAPM & Tax Inputs
Input the risk-free rate (10-year Treasury yield), market risk premium, beta, and your corporate/investor tax rate. Optionally expand the Dividend Growth Model section to add dividend yield and growth rate.
- 2
Review Your Results
The calculator displays After-Tax Cost of Equity (CAPM & DGM), pre-tax CAPM and DGM costs, Blended After-Tax Cost, and Equity Risk Premium. The Insights card compares CAPM vs. DGM, equity vs. debt cost, and beta sensitivity.
Example Calculation
An investor evaluates the after-tax cost of equity for a stock with beta 1.2, 3.5% risk-free rate, 6% market risk premium, and 25% tax rate.
Risk-Free Rate
3.5%
Market Risk Premium
6.0%
Beta
1.2
Corporate Tax Rate
25%
Dividend Yield
2.0%
Dividend Growth Rate
3.0%
Results
After-Tax Cost (CAPM)
8.02%
CAPM Pre-Tax
10.70%
DGM Pre-Tax
5.00%
After-Tax DGM
3.75%
Blended After-Tax
5.89%
Equity Risk Premium
7.20%
Insights card shows CAPM vs.
Tips
Use Current Risk-Free Rates
The 10-year Treasury yield is dynamic — it ranged from 3.8% to 4.7% in 2025. In the example, changing the risk-free rate from 3.5% to 4.5% would increase CAPM cost to 11.70% and after-tax to 8.77% — a 0.75 point increase. Update this input regularly.
CAPM for All Stocks, DGM for Dividend Payers
In the example, CAPM gives 10.70% while DGM gives 5.00% — a 5.70 point gap because this stock's dividends don't fully reflect its risk. Use CAPM as the primary model for growth stocks. DGM is most reliable for mature, stable dividend payers with predictable growth.
Compare After-Tax Equity to After-Tax Debt
In the example, 8.02% after-tax equity cost far exceeds typical after-tax debt (3-5%). Each dollar financed with equity costs ~4 points more than debt — but equity requires no repayment. Use our WACC Calculator to find the optimal blend.
The After-Tax Cost of Equity Formulas
The After-Tax Cost of Equity Calculator uses two models — CAPM and the Dividend Growth Model — then adjusts for investor-level taxation.
With a 3.5% risk-free rate, 6% market risk premium, beta of 1.2, and 25% tax rate, CAPM yields 10.70% pre-tax and 8.02% after-tax.
DGM (2% dividend yield + 3% growth) yields 5.00% pre-tax and 3.75% after-tax, blending to 5.89%.
CAPM Cost of Equity = Risk-Free Rate + Beta x Market Risk Premium
DGM Cost of Equity = Dividend Yield + Dividend Growth Rate
After-Tax Cost = Pre-Tax Cost x (1 - Tax Rate / 100)
Blended After-Tax = (After-Tax CAPM + After-Tax DGM) / 2
Equity Risk Premium = Beta x Market Risk Premium
The key: unlike debt interest, equity costs are not tax-deductible for the company.
The "after-tax" adjustment reflects the investor's tax burden on returns — at 25%, every $1 of equity return nets $0.75.
Worked Example: Estimating After-Tax Cost of Equity
An investor evaluates a stock with the following parameters.
Inputs:
- Risk-Free Rate: 3.5%
- Market Risk Premium: 6.0%
- Beta: 1.2
- Corporate Tax Rate: 25%
- Dividend Yield: 2.0%
- Dividend Growth Rate: 3.0%
Step-by-step:
- CAPM Cost of Equity: 3.5% + 1.2 x 6.0% = 3.5% + 7.2% = 10.70%
- DGM Cost of Equity: 2.0% + 3.0% = 5.00%
- After-Tax CAPM: 10.70% x (1 - 0.25) = 10.70% x 0.75 = 8.02%
- After-Tax DGM: 5.00% x 0.75 = 3.75%
- Blended After-Tax Cost: (8.02% + 3.75%) / 2 = 5.89%
- Equity Risk Premium: 1.2 x 6.0% = 7.20%
The 5.70 point CAPM-DGM gap indicates the dividend model underestimates this stock's required return — typical for companies where growth exceeds dividend payout.
When to Use CAPM vs. DGM
The choice between models depends on the company's characteristics:
| Company Type | Best Model | Why |
|---|---|---|
| Growth stocks (no dividends) | CAPM only | No dividend data for DGM — growth rate is speculative |
| Mature dividend payers | Both (blend) | DGM is grounded in observable dividends; CAPM adds risk perspective |
| Utilities / REITs | DGM-weighted | Stable, predictable dividends make DGM highly reliable |
| High-beta tech stocks | CAPM-weighted | Beta captures the systematic risk that dividends don't reflect |
| Startups / pre-revenue | Modified CAPM | Use industry beta as proxy — DGM is inapplicable |
For the example stock (beta 1.2, 2% yield), the CAPM-based 8.02% better reflects its risk profile since the 5.00% DGM cost suggests the market demands less return than the stock's volatility warrants.
Frequently Asked Questions
How does the tax rate affect the after-tax cost of equity?
The tax rate directly reduces the after-tax cost. In the example, a 25% tax rate reduces CAPM from 10.70% to 8.02% — a 2.68 point tax drag. At a 35% rate, the same CAPM cost drops to 6.96%. At 15%, it's 9.09%. Higher tax rates make equity cheaper on an after-tax basis, but the company doesn't get a deduction for equity costs like it does for debt interest.
Why does the calculator show both CAPM and DGM?
CAPM and DGM approach cost of equity from different angles. In the example, CAPM (10.70%) measures systematic risk via beta, while DGM (5.00%) is anchored to dividend fundamentals. The 5.70% gap is typical for growth stocks where dividends understate true required returns. For mature dividend payers, the models converge. The blended 5.89% averages both perspectives.
What does a high equity risk premium mean?
The equity risk premium (ERP) is beta x market risk premium — it's the extra return demanded above the risk-free rate. In the example, ERP = 1.2 x 6.0% = 7.20%. A high ERP (above 8%) signals high systematic risk — the stock amplifies market swings. A beta of 1.5 with the same 6% MRP gives 9.0% ERP, significantly raising the hurdle rate for investment decisions.