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25 July, 05:52

Eastern Electric currently pays a dividend of $1.64 per share and sells for $27 a share. a. If investors believe the growth rate of dividends is 3% per year, what rate of return do they expect to earn on the stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) b. If investors' required rate of return is 10%, what must be the growth rate they expect of the firm? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) c. If the sustainable growth rate is 5% and the plowback ratio is 0.4, what must be the rate of return earned by the firm on its new investments? (Enter your answer as a percent rounded to 2 decimal places.)

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  1. 25 July, 09:13
    0
    rate of return is 9.26%

    growth rate is 3.70%

    expected rate of return is 12.50%

    Explanation:

    stock price=Do * (1+g) / (r-g)

    Do is the dividend per share of $1.64

    g is the dividend growth rate of 3%

    r is the rate of return that is unknown

    stock price is $27

    27=1.64 * (1+3%) / (r-3%)

    27=1.64 * (1+0.03) / (r-0.03)

    27=1.6892 / (r-0.03)

    r-0.03=1.6892 / 27

    r = (1.6892/27) + 0.03

    r=9.26%

    If r=10.00%

    g=?

    27=1.64 * (1+g) / (10%-g)

    27 (10%-g) = 1.64 * (1+g)

    2.7-27g=1.64+1.64g

    2.7-1.64=1.64g+27g

    1.06=28.64g

    g=1.06/28.64

    g=3.70%

    Growth rate=cost

    C.

    expected rate of return = sustainable growth rate / plowback ratio

    sustainable growth rate is 5%

    plowback ratio is 0.4

    expected rate of return = 5%/0.4=12.50%
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Home » Business » Eastern Electric currently pays a dividend of $1.64 per share and sells for $27 a share. a. If investors believe the growth rate of dividends is 3% per year, what rate of return do they expect to earn on the stock?
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