Which factor can cause an increase in a company's cost of equity in a DCF valuation?

An increase in a company's cost of equity can result from a higher leveraged beta. In the context of a discounted cash flow (DCF) valuation, the cost of equity is influenced by the risk associated with the company's equity. Beta is a measure of a stock's volatility in relation to the market; it reflects the risk that equity investors perceive in holding the company's shares.

When a company is more leveraged—meaning it has a higher proportion of debt compared to equity—it can lead to an increase in the leveraged beta. This increase occurs because the use of debt amplifies the company's exposure to economic fluctuations. As a result, equity investors demand a higher return to compensate for the additional risk associated with the equity layer in a leveraged structure. Thus, as leveraged beta rises, so does the cost of equity.

In contrast, other factors listed may influence a company's financial situation but do not directly correlate to an increase in the cost of equity in the same way that a higher leveraged beta does. For instance, decreased revenue growth and reduced operational income can potentially affect overall returns, but they do not specifically signal an increased risk related to equity ownership. Increased tax rates, while impacting net income and cash flows, do not inherently increase the risk profile attributed to the equity investors.