Purchase Solution

Question about Constant-Growth model

Not what you're looking for?

Ask Custom Question

Eastern Electric currently pays a dividend of about $1.64 per share
and sells for $27 a share.
a. If investors believe the growth rate of dividends is 3 percent per year, what rate of return do
they expect to earn on the stock?
b. If investors' required rate of return is 10 percent, what must be the growth rate they expect
of the firm?
c. If the sustainable growth rate is 5 percent and the plow back ratio is .4, what must be the rate
of return earned by the firm on its new investments?

Purchase this Solution
Solution Summary

The solution explains various calculations using the constant growth model.

Solution Preview

a. If investors believe the growth rate of dividends is 3 percent per year, what rate of return do
they expect to earn on the stock?

Total expected rate of return = Dividend Yield + Capital gains ...

Purchase this Solution
Free BrainMass Quizzes
Understanding Management

This quiz will help you understand the dimensions of employee diversity as well as how to manage a culturally diverse workforce.

Transformational Leadership

This quiz covers the topic of transformational leadership. Specifically, this quiz covers the theories proposed by James MacGregor Burns and Bernard Bass. Students familiar with transformational leadership should easily be able to answer the questions detailed below.

IPOs

This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)

Accounting: Statement of Cash flows

This quiz tests your knowledge of the components of the statements of cash flows and the methods used to determine cash flows.

Change and Resistance within Organizations

This quiz intended to help students understand change and resistance in organizations

View More Free Quizzes
Related BrainMass Solutions

  • Calculations with the Cash Flow Model

    Once this task is complete, calculate the expected growth rate using the Constant Growth (or Gordon Growth) Model. You may need additional information to complete this exercise.

  • Expected Rate of Return and Constant Growth Model

    Negative so Excel can do the math FV $1.55 Dividend paid this year = Do) n 6 PMT 0 Rate This will be the Dividend Growth Rate ... = g Question 2 Constant Growth Model Estimate the value of

  • constant growth Vs. multi stage growth model for valuation

    Answers a conceptual question on which valuation model is appropriate under various situations. Three models discussed are DCF models with constant growth, two stage growth and three stage growth (280 words).

  • Discount Rate

    165158 Constant-Growth Model Constant-Growth Model. A stock sells for $40. The next dividend will be $4 per share.

  • Capital Asset Pricing Model and Stock Valuation and Growth Rate

    Question 2: Calculate "g". Next we estimate the value of D1, the dividend next year as required by the Constant Growth Model. D1 = Do(1 + g), where Do = the dividend today, $1.55 Question 3: Calculate "D1".

  • Valuation Model

    This model is much more accurate than the constant growth model. This is because it allows for changes in expectations which the constant growth model does not.

  • What is the new price of Ecology Labs, Inc. shares?

    The constant growth model or the Gordon Growth Model states that the price of the stock is given by: D1/(Ke -g), where r is the constant growth rate of the dividends (the rest of the notations are as used in the question). a.

  • CAPM and the Constant Dividend Growth Model

    Question 1 - What are the primary advantages and disadvantages of the Capital Asset Pricing Model (CAPM) compared with the Constant Dividend Growth Model for use in pricing common stock?

  • CAPM & Gorden growth model (Intel)

    Enter the ticker symbol for the company in question. Click on "Ratios" about halfway down the left hand side of the page. Gorden Growth model: P=D/(K-g) D= expected dividend per share one year from now.

View More Related Solutions