Mackenzie Company has a price of $32 and will issue a dividend of $2.00 next year. It has a beta of 1.5 , the risk-free rate is 5.3% , and the market risk premium is estimated to be 5.1%. a. Estimate the equity cost of capital for Mackenzie. 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 ) ?

Question

Jonathan Cantrell

Business

9 April, 19:36

Mackenzie Company has a price of $32 and will issue a dividend of $2.00 next year. It has a beta of 1.5 , the risk-free rate is 5.3% , and the market risk premium is estimated to be 5.1%. a. Estimate the equity cost of capital for Mackenzie. 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 ) ?

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Jayla Salazar · Answer 1

(a) 12.95%

(b) 6.70%

Explanation:

(a)

Risk free rate = 5.30%

Risk Premium = 5.10%

Beta = 1.50

Cost of Equity is calculated below using CAPM formula:

Expected rate of return:

= Risk free rate + Risk Premium * Beta

= 5.30% + 5.10% * 1.50

= 5.30% + 7.65%

= 12.95%

Hence, Cost of equity for company stock is 12.95%.

(b) Value of stock = Expected dividend : (cost of equity - Growth rate)

$32 = $2 : (12.95% - Growth rate)

(12.95% - Growth rate) = $2 : $32

Growth rate = 12.95% - 6.25%

= 6.70%

Hence, the growth rate in dividend is 6.70%.