Question

Hi, I have a question
Do we use pretax or post tax risk free rate in the CAPM

Answer 1

Looks like no one ask this question to the creators of such theories. This is where the WACC comes in to play. The cost of equity as per CAPM goes in WACC where a factor of (1-t) is used for calculating the post tax returns. The CAPM input (without adjusting tax) goes in to WACC formula, which takes tax in to consideration. Hope this answers your question. If you are presenting it to someone try to focus on WACC which is the final rate (post tax), and relevant for investors.

Answer 2

Thank you, that was exactly my question
Thanks