Business has been good for Keystone Control Systems, as indicated by the eleven-
ID: 2763616 • Letter: B
Question
Business has been good for Keystone Control Systems, as indicated by the eleven-year growth in earnings per share. The earnings have grown from $1.00 to $2.55.
Determine the compound annual rate of growth in earnings (n = 11). (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
Based on the growth rate determined in part a, project earnings for next year (E1). (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Assume the dividend payout ratio is 30 percent. Compute D1. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
The current price of the stock is $10. Using the growth rate (g) from part a and D1 from part c, compute Ke. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places..)
If the flotation cost is $2.50, compute the cost of new common stock (Kn) using growth rate (g) from part a and dividend (D1) from part c. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
Business has been good for Keystone Control Systems, as indicated by the eleven-year growth in earnings per share. The earnings have grown from $1.00 to $2.55.
Explanation / Answer
FV = PV ( 1+r)n 2.55= 1(1+n)^11 2.55= (1+n)^11 1+n = 1.089 n = 8.90% Growth Rate = 8.9% b, E1= 1*108.9% E1= 1.089 D1 Earnings*30% D1 = 1.089*30% 0.3267 D1= 0.3267 d. Price = D1/Ke-g 10 = .3267/Ke-.089 Ke-.089= .3267/10 Ke-.089= 0.03267 Ke= 0.12167 Ke = 12.16%
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