Mackenzie Company has a price of $33 and will issue a dividend of $2.00 next yea

Question

Mackenzie Company has a price of $33 and will issue a dividend of $2.00 next year. It has a beta of 1.2, the risk-free rate is 5.2%, and the market risk premium is estimated to be 4.7%.

Mackenzie Company has a price of $33 and will issue a dividend of $2.00 next year. It has a beta of 1.2, the risk-free rate is 5.2%, and the market risk premium is estimated to be 4.7% 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)? a. Estimate the equity cost of capital for Mackenzie The equity cost of capital for Mackenzie is 1%. (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 %. (Round to two decimal places.)

Explanation / Answer

a.cost of capital=Risk free rate+Beta*MArket risk premium

=5.2+(1.2*4.7)=10.84%

b.Cost of capital=(Dividend for next period/Current price)+Growth rate

0.1084=(2/33)+Growth rate

Hence Growth rate=0.1084-(2/33)=4.78%(Approx)

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