Question

10.10

The Bouchard Company's EPS was $6.50 in 2019, up from $4.42 in 2014. The company pays out 60% of its earnings as dividends, and its common stock sells for $35.00 a. Calculate the past growth rate in earnings. (Hint: This is a 5-year growth period.) Round your answer to two decimal places. b. The last dividend was Do = 0.60($6.50) = $3.90. Calculate the next expected dividend, D1, assuming that the past growth rate continues. Do not round intermediate calculations. Round your answer to the nearest cent. c. What is Bouchard's cost of retained earnings, rs? Do not round intermediate calculations. Round your answer to two decimal places. %

Answer 1

Answer 1)

Growth Rate in Earnings =

EPS2019 – EPS 2014 EPS 2014

=

6.50 -4.42 4.42

= 47.06%

Growth Rate per annum = 47.06% / 6 years = 7.84%  

Answer 2)

D1 = D0(1+G)

= 3.90(1+ 0.0784)

= $ 4.20576

Answer 3)

D Valueof Stock == Rateof Return – Growth Rate

35 = RateofR 4.20576 Rateof Return – 0.0784

35Rate of Return - 2.744 = 4.20576

35 Rate of Return = 4.20576 + 2.744

Rate of Return = 6.94976/35

= 19.86%

Cost of Equity = Cost of Retained Earnings = 19.86%

  NOTE: The answer to your question has been given below/above. If there is any query regarding the answer, please ask in the comment section. If you find the answer helpful, do upvote. Help us help you.