Cost of equity-problem 9-11

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.) Answer is 8%--show all work and formulas to support answer

(b) Calculate the next expected dividend per share D1. (Hint Do = 0.4 ($6.50) = $2.60.) Assume that the past growth rate will continue. Answer is $2.81 show all work and formulas

(c) What is Radon's cost of equity, rs? Answer is 15.81% show all work and formulas.