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Growth rates and common stock valuation

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. 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.

c. Assume the dividend payout is 40%. Compute D with "tiny one"
Round to two places to the right of the decimal point

d. The current price of the stock is \$50. Using growth rate (g) from part
a and (D1) from part c, compute K with tiny 

e. If the flotation cost is \$3.75, compute the cost of new common stock (K with tiny n)

Solution Preview

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

Use the compound interest formula to calculate the growth rate
FV= PV (1+rate)^n
FV = final amount = 1.63
PV = initial amount = 1.00
N = time = 4 years
1.63 = 1.00 (1+rate)^4
Rate = ...

Solution Summary

The solution explains how to determine the growth rates and use these for stock valuation

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