Question

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.)

Answer 1

Answer:

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%