Radon Homes\' current EPS is $6.38. It was $3.91 five years ago. The company pay

Question

Radon Homes' current EPS is $6.38. It was $3.91 five years ago. The company pays out 55% of its earnings as dividends, and the stock sells for $31. A. Calculate the historical growth rate in earnings. (Hint: This is a 5-year growth period.) Round your answer to two decimal places. ? % B. Calculate the next expected dividend per share, D1 (Hint: D0 = 0.55($6.38) = $3.51). Assume that the past growth rate will continue. Round your answer to the nearest cent. $ C. What is Radon Homes' cost of equity, rs? Round your answer to two decimal places. ? %

Explanation / Answer

a)

6.38 = 3.91(1+r)^5

growth rate, r = 10.29%

now,

b)

EPS for next yr = 3.91(1+r)^6= 6.38(1+r) = 6.38(1+.1029) = 7.036502

dividend is 55%

D1 = D0(1+r) = 3.51*(1+.1029) = $3.81

OR

D1 = .55*7.036502 = $3.87

c)

CoE = D1/P0 + g

where, D1 = expected dividend at the end or yr 1

Po = current price of equity

g = growth rate

Po = 31

D1 = 3.87

g = 10.29

CoE = 3.87/31 + 10.29 = 10.41 %

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