Because when you calculate your weighted average cost of capital, you discount the corporate tax rate... He likes this question because “everybody gives (him) some long pseudo-intellectual answer, when it’s really found in a simple math equation” But literally if your equity/your total cap * cost of equity (found through CAPM) equals 1 and your debt/total capital * cost of debt equals 1 — you would have found your total cost of equity, however you’d have to multiply your cost of debt by (1-t)... since the US corporate tax rate is 20%, it would be .8 I know it reads confusingly because it seems like it’s asking you to use the answer of the question as an input in your formula, but your cost of equity (Ke) is CAPM and your cost of debt (Kd) is basically the weighted average interest rate of the debt