Question

Business has been good for Keystone Control Systems, as indicated by the eleven-year growth in earnings per share. The earnings have grown from $1.00 to $2.58.

Determine the compound annual rate of growth in earnings (n = 11)

Based on the growth rate determined in part a, project earnings for next year (E₁).

Assume the dividend payout ratio is 35 percent. Compute D₁

The current price of the stock is $21. Using the growth rate (g) from part a and (D₁) from part c, compute K_e.

If the flotation cost is $3.00, compute the cost of new common stock (K_n) using growth rate (g) from part a and dividend (D₁) from part c.

Answer 1

Answer a:

Let,

Then,

= 1.09 - 1

= 0.09 or 9.00 %

Answer b:

Let,

E1 = Project Earnings for the next year

Then,

(Rounded to 2 decimal places)

Answer c:

Dividend Pay Out Ratio (DP) = (D1 / E1) x 100

Where,

DP = 35 %

E1 = 2.81

∴ 35 = (D1 / 2.81) x 100

∴ D1 = (35 x 2.81) / 100

∴ D1 = 0.9835 $

Answer d:

Answer e:

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