Question

The Bouchard Company's EPS was $6.50 in 2018, up from $4.42 in 2013. The company pays out 60% of its earnings as dividends, and its common stock sells for $40.00. Calculate the past growth rate in earnings. (Hint: This is a 5-year growth period.) Round your answer to two decimal places. % The last dividend was D0 = 0.60($6.50) = $3.90. Calculate the next expected dividend, D1, assuming that the past growth rate continues. Do not round intermediate calculations. Round your answer to the nearest cent. $ What is Bouchard's cost of retained earnings, rs? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Given,

2018 EPS = $6.50

2013 EPS = $4.42

Dividend payout ratio = 60%

Stock price = $40

Past growth rate = (2018 EPS 2013 EPS)^1/5 - 1

= ($6.50 $4.42)^1/5 - 1

= (1.47058823529)^1/5 - 1

= 1.080185187 - 1 = 0.080185187 or 8.02%

Last dividend = $3.90

Next expected dividend = last dividend x (1 + past growth rate)

= $3.90 x (1 + 0.080185187)

= $3.90 x (1.080185187) = $4.2127222293 or $4.21

Cost of retained earnings = (next expected dividend stock price) + growth rate

= ($4.2127222293 $40) + 0.080185187

= 0.10531805573 + 0.080185187 = 0.1855 or 18.55%