Question

Problem 11-18 Growth rates and common stock valuation [LO11-3] 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 $2.55. a. Determine the compound annual rate of growth in earnings (n = 11). (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) b. Based on the growth rate determined in part a, project earnings for next year (E1).(Do not round intermediate calculations. Round your answer to 2 decimal places.) c. Assume the dividend payout ratio is 30 percent. Compute D1. (Do not round intermediate calculations. Round your answer to 2 decimal places.) d. The current price of the stock is $10. Using the growth rate (g) from part a and D1 from part c, compute Ke. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places..) e. If the flotation cost is $2.50, compute the cost of new common stock (Kn) using growth rate (g) from part a and dividend (D1) from part c. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Answer 1