Problem 11-18 Growth rates and common stock valuation [LO11-3]

Business has been good for Keystone Control Systems, as indicated by the ten-year growth in earnings per share. The earnings have grown from $1.00 to $1.48.

a. Determine the compound annual rate of growth in earnings (n = 10). (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Compound annual rate of growth

%

b. Based on the growth rate determined in part a, project earnings for next year (E₁). (Do not round intermediate calculations. Round your answer to 2 decimal places.)

E1

c. Assume the dividend payout ratio is 50 percent. Compute D₁. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

D1

d. The current price of the stock is $14. Using the growth rate (g) from part a and (D₁) from part c, compute K_e. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Ke

%

e. If the flotation cost is $1.50, compute the cost of new common stock (K_n) using growth rate (g) from part a and dividend (D₁) from part c. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Kn

%