Question 1: Cost of Equity Radon Homes'; current EPS is $6.03. It was $4.45 five years ago. The company pays out 50 percent of its earnings as dividends, and the stock sells for $40.
a. Calculate the past growth rate in earnings. (Hint: This is a 5-year growth period.) Round the answer to the nearest hundredth.
b. Calculate the next expected dividend per share, [D1 D0 = 0.50($6.03) = $3.02]. Assume that the past growth rate will continue. Round the answer to the nearest hundredth.
c. What is the cost of equity, rs, for Radon Homes? Round the answer to the nearest hundredth.