Problem:
Radon Homes's current EPS is $6.25. It was $3.88 5 years ago. The company pays out 55% of its earnings as dividends, and the stock sells for $34.
Requirement:
a) Calculate the historical growth rate in earnings. (Hint: This is a 5-year growth period.)
b) Calculate the next expected dividend per share, D1 (Hint: D0 = 0.55($6.25) = $3.44). Assume that the past growth rate will continue.
c) What is Radon's cost of equity, rs? Justify your answer with the appropriate computations.