Problem:
Acme Corporation's next expected dividend (D1) is $2.50. The firm has maintained a constant payment ratio of 50 percent during the past 7 years. Seven years ago its EPS was $1.50. The firm's beta coefficient is 1.2. The required rate of return on an average stock in the market is 13 percent, and the risk-free rate is 7 percent. Acme's A-rated bonds are yielding 10 percent, and its current stock price is $30. Which of the following values is the most reasonable estimate of Acme's cost of common equity, rs?