Eastern Electric currently pays a dividend of about $1.71 per share and sells fo

Question

Eastern Electric currently pays a dividend of about $1.71 per share and sells for $46 a share. a. If investors believe the growth rate of dividends is 6% 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.) Rate of return 9.94 %

b. If investors' required rate of return is 12%, 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.) Growth rate

***I'm having a problem with b I put 7.98 and 8 and it says its wrong so hope someone can help

c. If the sustainable growth rate is 6% and the plowback ratio is .4, 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.) Rate of return 15 %

Explanation / Answer

a. required rate of return = 1.71*1.06/46 + 6% = 9.94%

b. 46 = 1.71*(1 + g)/0.12 - g)

3.2281 - 26.9006g = 1 + g

g = 7.99%

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.