Question 2 The most widely accepted and used method of calculating the cost of equity for a firm today is the capital asset pricing model {CAPM}. CAPM defines the cost of equity to be the sum of a riskfree interest component and a firmspecific spread, over and above that risk free component, as seen in the following formula: If the beforetax cost of debt is kdr and the corporate income taxis t, the afte rtax cost of debt is: International CAPM {lCAPM} assumes that there is a global market in which the firm's equity trades, and therefore Kdllt} New estimates of the firm's beta Individual Firms in lndiyidual Markets Foreign exchange risk and political risk