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

a..

P0 = D1/Ke – g

31= (1.72x1.03) / Ke – 0.03

31Ke – 0.93=1.7716

Ke = 2.7016/31

Ke = 0.087 = 8.7%

b..

P0 = D1/Ke – g

31 = 1.7716/.10-g

3.1 – 31g = 1.7716

g= 0.04285 = 4.285%

c.. plowback ratio = 0.5

D1 = 1.72 X 1.07 = 1.8404

Net income for equity share holder (EPS) = 1.8404/.5= 3.6808 per share

P0 = Current market price, D1= Dividend at end of year 1,g = growth, Ke = cost of equity

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