Eastern Electric currently pays a dividend of about $1.72 per share and sells fo

Question

Eastern Electric currently pays a dividend of about $1.72 per share and sells for $31 a share.

If investors believe the growth rate of dividends is 3% per year, what is the opportunity cost of capital?(Do not round intermediate calculations. Round your answer to 2 decimal places.)

If investors' opportunity cost of capital is 10%, what must be the growth rate they expect of the firm?(Do not round intermediate calculations. Round your answer to 2 decimal places.)

If the sustainable growth rate is 7% and the plowback ratio is .5, what must be the return on equity ROE? (Round your answer to 2 decimal places.)

Eastern Electric currently pays a dividend of about $1.72 per share and sells for $31 a share.

Explanation / Answer

Answer:a Calculation of the opportunity cost of capital:

$31=$1.72(1+0.03)/(r-0.03)

31r-0.93=1.7716

r=8.71%

Answer:b Calculation of the growth rate they expect of the firm:

$31=$1.72(1+g)/(0.10-g)

$31=$1.72+1.72g/(0.10-g)

$3.1-31g=$1.72+1.72g

$1.38=32.72g

g=4.22%

Answer:c Calculation of the return on equity ROE:

            g = return on equity ´ plowback ratio

7%=ROE*0.5

ROE=7%/0.5=14%

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