Question: Eastern Electric currently pays a dividend of about $1.64 per share and sells for $27 a share.
1. If investors believe the growth rate of dividends is 3 percent per year, what rate of return do they expect to earn on the stock?
2. If investors' required rate of return is 10 percent, what must be the growth rate they expect of the firm?
3. If the sustainable growth rate is 5 percent and the plow back ratio is .4, what must be the rate of return earned by the firm on its new investments?