Cost of Equity Radon Homes\'s current EPS is $7.61. It was $4.79 5 years ago. Th
ID: 2645085 • Letter: C
Question
Cost of Equity
Radon Homes's current EPS is $7.61. It was $4.79 5 years ago. The company pays out 35% of its earnings as dividends, and the stock sells for $37.
Calculate the historical growth rate in earnings. (Hint: This is a 5-year growth period.) Round your answer to two decimal places.
%
Calculate the next expected dividend per share, D1 (Hint: D0 = 0.35($7.61) = $2.66). Assume that the past growth rate will continue. Round your answer to the nearest cent.
$
What is Radon's cost of equity, rs? Round your answer to two decimal places.
%
Explanation / Answer
A.))
Growth rate = (Price Five years back / Current Price)^(1/number of years) - 1
Growth rate = (7.61 / 4.79) ^ (1/5) - 1
Growth rate = 9.7%
b) Calculate the next expected dividend per share, D1[D0=0.35($7.61)=$2.67]. Assume that the past growth rate will continue.
D1 = D0 X (1 + Growth)
D1 = 2.67 X (1 + 9.7%)
D1 = 2.93
c) What is the cost of equity, rs, for Radon Homes?
Cost of equity = D1 / P0 + Growth
Cost of equity = 2.93 / 37 + 9.7%
Cost of equity = 17.62%