Radon Homes\'s current EPS is $6.94. It was $4.38 5 years ago. The company pays

Question

Radon Homes's current EPS is $6.94. It was $4.38 5 years ago. The company pays out 35% of its earnings as dividends, and the stock sells for $32.

Calculate the historical growth rate in earnings. (Hint: This is a 5-year growth period.) Round your answer to two decimal places.
     %

Calculate the next expected dividend per share, D1 (Hint: D0 = 0.35($6.94) = $2.43). Assume that the past growth rate will continue. Round your answer to the nearest cent.
$    

What is Radon's cost of equity, rs? Round your answer to two decimal places.
     %

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Part A:

Nper = 5 (indicates the period)

PV = 4.38 (indicates the EPS five years ago)

FV = 6.94 (indicates the EPS today)

Rate = ? (indicates growth rate)

PMT = 0 (indicates the amount ofpayment)

Growth Rate = Rate(Nper,PMT,PV,FV) = Rate(5,0,-4.38,6.94) = 9.64%

-----------

Part B:

Divided Per Share (Next Year) = Current Dividend*(1+Growth Rate) = 6.94*35%*(1+.0964) = $2.66

------

Part C:

Cost of Equity = D1/Current Stock Price + Growth Rate = 2.66/32 + 9.64% = 17.95%

Thanks.

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