Question
Problem 11-11 Cost of Equity Cost of Equity Radon Homes current EPS is $6.50. It was $4.42 5 years ago. The company pays out 40%
Problem 11-11 Cost of Equity
Cost of Equity
Radon Homes current EPS is $6.50. It was $4.42 5 years ago. The company pays out 40% of its earnings as dividends, and the stock sells for $36.
Calculate the historical growth rate in earnings. (Hint: This is a 5-year growth period.) Answer: 8%.
Calculate the next expected dividend per share, D1.
(Hint: D0 = 0.4($6.50 ) = $2.60.) Assume that the past growth rate will continue. Answer: $2.81.
What is Radons cost of equity, rs ? Answer: 15.81%
Suppose the values for this problem change to:
The historic EPS value of $4.42 is from 6 years ago.
Dividend Payout Ratio: 69%
Current Stock Price: $30.8
What is the cost of equity?
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