Problem 7-17 Constant-Growth Model (LO2)

Eastern Electric currently pays a dividend of $1.76 per share and sells for $35 a share.

a. If investors believe the growth rate of dividends is 2% 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 4% and the plowback ratio is 0.2, 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.)