Problem:
A company had earnings per share (EPS) of $6.32 at the end of 2007 and $11.48 at the end of 2012. The company pays out 30 percent of its earnings as dividends per share (DPS), and the company's stock price is currently $37.50 (3/24/2013).
Required:
Question 1: Calculate the growth rate in dividends (g) over this 5-year period.
Question 2: Calculate the expected dividend per share next year (i.e., what is D1, assuming the earnings and dividends of this firm grow at a constant rate).
Question 3: Based on the information given above, what is the cost of retained earnings common equity (rs) for the company?
Note: Provide support for rationale.