Problem 9-11 Cost of Equity Radon Homes\' current EPS is $7.39. It was $3.61 5 y
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Question
Problem 9-11
Cost of Equity
Radon Homes' current EPS is $7.39. It was $3.61 5 years ago. The company pays out 55% of its earnings as dividends, and the stock sells for $30.
Calculate the historical growth rate in earnings. (Hint: This is a 5-year growth period.) Do not round intermediate calculations. Round your answer to two decimal places.
%
Calculate the next expected dividend per share, D1. (Hint: D0 = 0.55($7.39) = $4.06.) Assume that the past growth rate will continue. Do not round intermediate calculations. Round your answer to the nearest cent.
$
What is Radon's cost of equity, rs? Do not round intermediate calculations. Round your answer to two decimal places.
%
Explanation / Answer
1.
Growth rate = [$7.39 / $3.61]1/5 - 1
= [2.04709]0.2 - 1
= 15.40%.
2.
D0 = $4.06
D1 = $4.06 (1 + 15.40%)
= $4.67
3. Cost of equity = (D1 / Ke) + g
= ($4.67 / $30 ) + 0.1540
= 30.97%.
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