Business has been good for Keystone Control Systems, as indicated by the four-year growth in earnings per share. The earnings have grown from $1.00 to $1.63.
a. Use Appendix A at the back of the text to determine the compound annual rate of growth in earnings (n = 4).
b. Based on the growth rate determined in part a, project earnings for next year (E1). Round to two places to the right of the decimal point.
c. Assume the dividend payout ratio is 40 percent. Compute D1. Round to two places to the right of the decimal point.
d. The current price of the stock is $50. Using the growth rate (g) from part a and (D1) from part c, compute Ke.
e. If the flotation cost is $3.75, compute the cost of new common stock (Kn).