Now that McCormick & Company has secured the land for the new factory through a loan, 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 expected 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 US 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, use the template to the right.

1. What is McCormick & Company's expected 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 expected return of McCormick & Company's stock, we will use the Dividend Discount Model (DDM). We can help McCormick & Company with this by answering the following questions using the provided information below:

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

2. Using the Dividend Discount Model (DDM), what is the cost of equity?

To find the cost of equity using DDM, we take the original equation

and rearrange the equation: