The Bouchard Company\'s EPS was $6.96 in 2005, up from $3.34 in 2000. The compan

Question

The Bouchard Company's EPS was $6.96 in 2005, up from $3.34 in 2000. The company pays out 50% of its earnings as dividends, and its common stock sells for $40.

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

b. The last dividend was D0 = 0.50($6.96) = $3.48. Calculate the next expected dividend, D1, assuming that the past growth rate continues. Round your answer to two decimal places.


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

Explanation / Answer

Earnings growth rate is found using a formula for geometric returns.

that is = ((second dividend/first dividend)^(1/t))-1 where t = time

= ((6.96/3.34)^(1/5))-1 = 15.82% annualized earnings growth rate

the next EPS number will be 6.96 x (1+0.1582) = $8.06

the next dividend is the next EPS times the payout rate (in this case its 50% of earnings) so its $4.03

Finally the cost of retained earnings is RE per share/price per share.

Retained earnings = net Income - dividends

Here net income per share is $8.06 and dividends are $4.03 which means Retained Earnings is $4.03 per share.

= $4.03/$40 = 10.08%

Hope this helps!

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.