Question

Score: 0 of 1 pt 8 of 14 (1 complete) HW Score: 7.14%, 1 of 14 pts P 13-13 (similar to) : Question Help Mackenzie Company has a price of $31 and will issue a dividend of $2.00 next year. It has a beta of 1.2, the risk-free rate is 5.9%, and the market risk premium is estimated to be 4.8%. 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 %. (Round to two decimal places.)

Answer 1

a. Equity cost of capital = Risk-free rate + Beta(Market risk premium)

Equity cost of capital = 0.059 + 1.2(0.048)

Equity cost of capital = 0.1166 or 11.66%

b. P₀ = D₁ / (r - g)

$31 = $2.00 / (0.1166 - g)

0.1166 - g = $2.00 / $31

0.1166 - g = 0.0645

g = 0.1166 - 0.0645

g = 0.0521 or 5.21%