Question

Mackenzie Company has a price of $33 and will issue a dividend of $2.00next year. It has a beta of 1.5​, the​ risk-free rate is 5.9%​, 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​)?

Answer 1

Given,

Price = $33

Expected dividend = $2.00

Beta = 1.5

Risk free rate = 5.9% or 0.059

Market risk premium = 5.1% or 0.051

Solution :-

(a)

Equity cost of capital = Risk free rate + (beta x market risk premium)

= 0.059 + (1.5 x 0.051)

= 0.059 + 0.0765 = 0.1355 or 13.55%

(b)

Let growth rate be 'g'

Price = Expected dividend (equity cost of capital - g)

$33 = $2.00 (0.1355 - g)

0.1355 - g = $2.00 $33

0.1355 - g = 0.0606060606

0.1355 - 0.0606060606 = g

0.07489 = g

So,

Dividend growth rate = 0.07489 or 7.489%