I can\'t figure out C. Problem 10-16. Cost of common equity The Bouchard Company

Question

I can't figure out C.

Problem 10-16. Cost of common equity

The Bouchard Company's EPS was $5.39 in 2005, up from $3.08 in 2000. The company pays out 35% of its earnings as dividends, and its common stock sells for $38.

a. Calculate the past growth rate in earnings. (Hint: This is a 5-year growth period.) Round your answer to two decimal places. 11.84


b. The last dividend was D0 = 0.35($5.39) = $1.89. Calculate the next expected dividend, D1, assuming that the past growth rate continues. Round your answer to two decimal places. 2.10

c. What is Bouchard's cost of retained earnings, rs? Round your answer to two decimal places.

Explanation / Answer

So we must use: P = D(1)/(r-g) where P = price D(1) = next dividend r = cost of equity g = growth where: P = $38 D(1) = 5.39*(1.1184) = 6.03*0.35 = $2.11 r = solve for this g = 0.1184 38 = (2.11)/(r-0.1184) and solving for r we get 17.39% or the cost of common equity. Hope this helps!

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