Business has been good for Keystone Control Systems, as indicated by the four-ye

Question

Business has been good for Keystone Control Systems, as indicated by the four-year growth in earnings per share. The earnings have grown from $1.00 to $3.51.

Determine the compound annual rate of growth in earnings (n = 4). (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 45 percent. Compute D1. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

The current price of the stock is $20. 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 $3.00, 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 four-year growth in earnings per share. The earnings have grown from $1.00 to $3.51.

Explanation / Answer

(a)Compound Annual rate of Growth= (Ending Value/Beginning Value)1/No. of Years -1

     =(3.51/1)1/4 -1

=36.88%

(b) Earnings Next year= Earnings Current year+Growth

=1+(1*36.88%)

=1.3688

(c) Payout ratio =45%

Earnings = 1.3688

Dividend= 0.45*1.3688

D1 =$0.62

(d) Ke= D1/P0+g

=(0.62/20)+0.3688

= 0.3988

Ke= 39.88%

(e) Kn= (D1/(P0-F))+g

=0.62/($20-$3)+0.3688

=0.4053

Kn= 40.53%

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