Mackenzie Company has a price of $ 30 and will issue a dividend of $ 2.00 next year. It has a beta of 1.3 , the risk-free rate is 5.1 % , and the market risk premium is estimated to be 5.1 %. a. Estimate the equity cost of capital for Mackenzie. b. Under the CDGM, at what rate do you need to expect Mackenzie's dividends to grow to get the same equity cost of capital as in part (a ) ? a. Estimate the equity cost of capital for Mackenzie. The equity cost of capital for Mackenzie is nothing %. (Round to two decimal places.) b. Under the CGDM, at what rate do you need to expect Mackenzie's dividends to grow to get the same equity cost of capital as in part (a ) ? The expected growth rate for dividends is nothing %. (Round to two decimal places.)

Question

Neveah Arroyo

Business

17 October, 06:26

Mackenzie Company has a price of $ 30 and will issue a dividend of $ 2.00 next year. It has a beta of 1.3 , the risk-free rate is 5.1 % , and the market risk premium is estimated to be 5.1 %. a. Estimate the equity cost of capital for Mackenzie. b. Under the CDGM, at what rate do you need to expect Mackenzie's dividends to grow to get the same equity cost of capital as in part (a ) ? a. Estimate the equity cost of capital for Mackenzie. The equity cost of capital for Mackenzie is nothing %. (Round to two decimal places.) b. Under the CGDM, at what rate do you need to expect Mackenzie's dividends to grow to get the same equity cost of capital as in part (a ) ? The expected growth rate for dividends is nothing %. (Round to two decimal places.)

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Answers (1)

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Rogelio Mcconnell · Answer 1

a) 11.73% b) g = 18.40%

Explanation:

a) Cost of Capital = ?

Given beta = 1.3, RF = 5.1%, MRP = 5.1%

USE CAPM to calculate cost of capital

Ke = RF + b * (RM-RF)

= 5.1+1.3 (5.1%)

=11.73%

b) SP = D1 / r - g

30 = 2 / (0.1173 - g)

30 (0.1173-g) = 2

30 (0.1173-g) / 30 = 2/30

0.1173-g = 0.067

g = 0.1173+0.06=0.1840/18.40%