Eastern Electric currently pays a dividend of about $1.83 per share and sells fo

Question

Eastern Electric currently pays a dividend of about $1.83 per share and sells for $29 a share.

If investors believe the growth rate of dividends is 2% 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.)

C. 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 $1.83 per share and sells for $29 a share.

Explanation / Answer

According to dividend-discount model,

P0 = D1/(R-G)

P0 = Current stock price

D1 - Dividend at t =1

R - Required rate

G - Growth rate

a.

29 = 1.83*(1+0.02)/(R-0.02)

R = 0.0844 = 8.44%

b.

29 = 1.83*(1+0.02)/(0.1-g)

g = 0.0356 = 3.56%

c.

Sustainable growth rate = Return on equity*Plowback ratio

Return on equity = 3%/0.3 = 0.1 = 10%

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

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