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A company has fallen on hard times and has experienced a decrease in its earnings per share (EPS) from $5.50 in 2006 to $4.60 last year (2011).


A company has fallen on hard times and has experienced a decrease in its earnings per share (EPS) from $5.50 in 2006 to $4.60 last year (2011). By standard practice, the company pays out 45 percent of its earnings as dividends per share (DPS), and the company’s stock price was selling for $14.65 in the secondary market (at the end of 2011).

(a) Calculate the growth rate in dividends (g) over this 5-year period.
(b) Calculate the expected dividend per share at the end of this year (i.e., what is D1, assuming the earnings and dividends of the company grow/decay at a constant rate).
(c) Based on the information given above, what is the cost of retained earnings common equity (rs) for this company?

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