Cost of Equity Radon Homes\'s current EPS is $6.16. It was $3.73 5 years ago. Th
ID: 2649766 • Letter: C
Question
Cost of Equity
Radon Homes's current EPS is $6.16. It was $3.73 5 years ago. The company pays out 55% 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.) Round your answer to two decimal places.
%
Calculate the next expected dividend per share, D1 (Hint: D0 = 0.55($6.16) = $3.39). 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
Cost of Equity
Radon Homes's current EPS is $6.16. It was $3.73 5 years ago. The company pays out 55% 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.) Round your answer to two decimal places.
Growth rate in earnings. = (current EPS / 5 year ago EPS ^(1/5) - 1
Growth rate in earnings. = (6.16/3.73)^(1/5) - 1
Growth rate in earnings. = 10.55%
Calculate the next expected dividend per share, D1 (Hint: D0 = 0.55($6.16) = $3.39). Assume that the past growth rate will continue. Round your answer to the nearest cent.
Next expected dividend per share, D1 = D0 *(1+Growth Rate)
Next expected dividend per share, D1 = 3.39*(1+10.55%)
Next expected dividend per share, D1 = $ 3.75
What is Radon's cost of equity, rs? Round your answer to two decimal places.
Cost of equity, rs = D1 / P0 + Growth
Cost of equity, rs = 3.75/36 + 10.55%
Cost of equity, rs = 20.97%