Cost of Equity

Radon Homes' current EPS is $7.60. It was $4.28 5 years ago. The company pays out 40% of its earnings as dividends, and the stock sells for $36.

1. 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.

   %

2. Calculate the next expected dividend per share, D₁. (Hint: D₀ = 0.40($7.60) = $3.04.) Assume that the past growth rate will continue. Do not round intermediate calculations. Round your answer to the nearest cent.

   $

3. What is Radon's cost of equity, r_s? Do not round intermediate calculations. Round your answer to two decimal places.

   %