Cost of Equity

Radon Homes' current EPS is $8.00. It was $4.64 5 years ago. The company pays out 50% of its earnings as dividends, and the stock sells for $32.

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.

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2. Calculate the next expected dividend per share, D₁. (Hint: D₀ = 0.50($8.00) = $4.00.) Assume that the past growth rate will continue. Do not round intermediate calculations. Round your answer to the nearest cent.

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

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