Eastern Electric currently pays a dividend of about $1.70 per share and sells fo

Question

Eastern Electric currently pays a dividend of about $1.70 per share and sells for $27 a share.

If investors believe the growth rate of dividends is 5% 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 15%, 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 3% and the plowback ratio is .3, what must be the return on equity ROE? (Round your answer to 2 decimal places.)

Eastern Electric currently pays a dividend of about $1.70 per share and sells for $27 a share.

Explanation / Answer

Eastern Electric currently pays a dividend of about $1.70 per share and sells for $27 a share.

P = D1/(r-g)

27 = 1.7*1.05/(r-5%)

cost of capital = 11.61%

b.P = D1/(r-g)

27 = 1.7*(1+g)/(15%-g)

2.38 -15.88 g = 1+g

g = 8.19%

c. sustainable growth rate =ROE x (1 - dividend-payout ratio)

3% = ROE*.3

ROE= 10%

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