Problem 9-11 Cost of Equity Radon Homes's current EPS is $7.80. It was $4.43 5 years...
Problem 9-11
Cost of Equity
Radon Homes's current EPS is $7.80. It was $4.43 5 years ago. The company pays out 50% 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.) Round your answer
to two decimal places.
% - Calculate the next expected dividend per share,
D1 (Hint: D0 = 0.50($7.80) = $3.90).
Assume that the past growth rate will continue. Round your answer
to the nearest cent.
$ - What is Radon's cost of equity, rs? Round your answer to two decimal places %
- Please show all formulas and steps to arrive at the solution.
Homework Answers
a) growth in earnings, g = (D5 / D0)^(1/5) - 1 = (7.8 / 4.43)^(1/5) - 1 = 11.98%
b) D1 = D0 x (1 + g) = 3.90 x (1 + 11.98%) = $4.37
c) Cost of equity, rs = D1 / P + g = 4.37 / 30 + 11.98% = 26.54%
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Problem 9-11
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