Chapter 11, Problem 18P

Business has been good for Keystone Control Systems, as indicated by the four-year growth in earnings per share. The earnings have grown from $\text{\$1}\text{.00 to \$1}\text{.63}\text{.}$

a. Determine the compound annual rate of growth in earnings $\left(n= 4\right)$ .

b. Based on the growth rate determined in part a, project earnings for next year $\left(E_1\right)$ . Round to two places to the right of the decimal point.

c. Assume the dividend pay out ratio is 40 percent. Compute $D_1$ . Round to two places to the right of the decimal point.

d. The current price of the stock is $\text{\$50}\text{.}$ Using the growth rate (g) from part a and $\left(D_1\right)$ from part c, compute $K_e$ .

e. If the flotation cost is $\text{\$3}\text{.75,}$ compute the cost of new common stock $\left(K_n\right).$