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?