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Mackenzie Company has a price of $38 and will issue a dividend of $2
Mackenzie Company has a price of $38 and will issue a dividend of $2.00 next year. It has a beta of 1.3, the risk-free rate is 5.8%, and the market risk premium is estimated to be 4.9%.
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)?
Expert Solution
a). Computation of the cost of equity:-
Cost of equity = Risk free rate + (Beta * Market risk premium)
= 5.8% + (1.3 * 4.9%)
= 5.8% + 6.37%
= 12.17%
b). Computation of the growth rate:-
Current price = D1 / (Cost of equity - Growth rate)
$38 = $2 / (12.17% - Growth rate)
(12.17% - Growth rate) = $2 / $38
Growth rate = 12.17% - 5.26%
= 6.91%
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