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 $100 to $170. a. 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.) Compound annual rate of growth b. 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.) E1 c. Assume the dividend payout ratio is 45 percent Compute D (Do not round Intermartiate calculations. Round your answer to 2

Answer 1

a). Compound Annual Growth(CAGR)=

EndValue Noof Years - StartValue

No. of years (n)= 11 years

End Value= $1.70

Start Value= $ 1.00

CAGR=

(上) -1 100

= 1.0489-1

=0.0489 or 4.89%

B). Growth Rate (g)= 4.89%

Last earning (E_o) = $1.70

E₁= E_o(1+g)

= 1.70(1+.0489)

=$1.78

c). Dividend Payout Ratio= (D₁/E₁)*100

45= (D₁/1.78)*100

D₁= $0.80

d). Current Stock Price (P_o)= $17

    D₁= $0.80

g= 4.89%

K_e= (D₁/P_o)+g

= (0.80/17)+0.0489

K_e= 9.59%

e). Floating Cost= $2.00

Kn=

Di Pe Æta

= (0.80/(17-2))+0.0489

Kn= 10.22%