Eastern Electric currently pays a dividend of about $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?
b. If investors required rate of return is 10%, what must be the growth rate they expect of the firm?
c. If the sustainable growth rate is 5% and the plow back ratio is .4, what must be the rate of
return earned by the firm on its new investments?
Dividend per share.................................$1.64
Stock price.................................................$27.00
Growth rate of dividends (a) ....................3.00%
Required rate of return (b) ........................10.00%
Sustainable growth rate...............................5.00%
Plow back ratio............................................ 0.40