After-Tax Cost of Equity Calculator

Enter your risk-free rate, beta, market risk premium, tax rate, and dividend inputs to calculate your after-tax cost of equity using both CAPM and the Dividend Growth Model.

Created by Luis GonzalezLast updated: 2026-06-08

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.

💡 To see how debt's tax deductibility compares, our After-Tax Cost of Debt Calculator shows the tax shield that makes debt cheaper than equity on an after-tax basis.

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.

💡 For complete capital structure analysis, our WACC Calculator combines your after-tax equity and debt costs into a single weighted cost of capital.

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.