Question

The Bouchard Company's EPS was $6.14 in 2016, up from $3.87 in 2011. The company pays out 60% of its earnings as dividends, and its common stock sells for $36. Calculate the past growth rate in earnings. (Hint: This is a 5-year growth period.) Round your answer to two decimal places. % The last dividend was D0 = 0.60($6.14) = $3.68. Calculate the next expected dividend, D1, assuming that the past growth rate continues. $ What is Bouchard's cost of retained earnings, rs?

Answer 1

Answer and Explanation:

The computation is shown below

1. Past Growth rate in earnings is

= ($6.14 ÷  $3.87 ^(1 ÷ 5) - 1

= 1.5866 ^ (1 ÷ 5) - 1

= 1.0967 - 1

= 9.67%

b. The next year dividend is shown below:

Current year dividend = $3.68

So,

Expected dividend next year is

= $3.68 × (1 + 9.67%)

= $4.04

c.  Now

Cost of retained earnings = (Expected dividend ÷  Current stock Price) + Growth rate

= ($4.04 ÷ $36) + 9.67%

= 20.89%

We simply applied the above formulas