Eastern Electric currently pays a dividend of about $1.64 per share and sells for $27 a share.

Question:

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 plowback 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%

Plowback ratio............................................ 0.40

Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...