(9–11)

Cost of Equity Radon Homes’ current EPS is $6.50. It was $4.42 five years ago. The company pays out 40% of its earnings as dividends, and the stock sells for $36.

a. Calculate the historical growth rate in earnings. (Hint: This is a 5-year growth period.)

b. Calculate the next expected dividend per share, D1. (Hint: D0 = 0.4($6.50) =

$2.60.) Assume that the past growth rate will continue.

c. What is Radon Homes’ cost of equity, rs?