Now that McCormick & Company has secured the land for the new factory through a loan, now it is time to construct the new factory. Instead of using operating cash flow to fund the construction of the new factory, McCormick & Company has decided to raise capital. To raise additional capital the company is considering issuing additional shares of stock. For McCormick & Company to determine how much it will cost the company to issue stock, the company must determine the required return on the stock in relation to the systematic risk. We can help McCormick & Company with this by answering the following questions using the provided information below:
McCormick & Company uses the 10-Year Treasury Constant Maturity Rate as the risk-free rate. As of 7/1/2019, this was 2.03 according to the U.S. Treasury.
McCormick & Company has disclosed the company's levered Beta is 0.60 (MarketWatch, 7/1/2019).
McCormick & Company has disclosed the company's expected return on the market is 8.03%
To answer the following questions, please use the template to the right.
- What is McCormick & Company's required return on the issuance of stock using CAPM?
In the CAPM, we examined the expected return on the market as a whole. In an effort to estimate the required return of McCormick & Company's stock, we will assume market equilibrium and use the Dividend Valuation Model (DVM), which is the expected return of McCormick' & Company stock. To find the cost of equity using DVM, we take the original equation
and rearrange it solving for
R
s:
→
McCormick & Company's expected dividend per share next year is $2.28
McCormick & Company's expected dividend per share constant growth rate is 8.70% (as of May 2019)
McCormick & Company's stock price per share was $155.70 on 7/1/2019
- Using the DVM what is the cost of equity?