Problem 11-11 Cost of Equity Radon Homes\'s current EPS is $7.25. It was $4.01 5

Question

Problem 11-11 Cost of Equity Radon Homes's current EPS is $7.25. It was $4.01 5 years ago. The company pays out 55% of its earnings as dividends, and the stock se snor so. a. Calculate the historical growth rate in earnings. Round your answer to two decimal places. (Hint: This is a 5-year growth period.) b. Calculate the next expected dividend per share, D1 Assume that the past growth rate will continue. Round your answer to the nearest cent. (Hint: Do = 0.55($7.25) = $3.99) c. What is Radon's cost of equity, rs? Round your answer to two decimal places

Explanation / Answer

a) historical growth rate = (7.25/4.01)1/5 - 1 = 12.57%

b) D1 = 7.25*0.55*1.1257 = 4.49

c) cost of equity = 4.49/40 + 12.57% = 23.79%

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