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    Question about Constant-Growth model

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    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?

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    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 ...

    Solution Summary

    The solution explains various calculations using the constant growth model.

    $2.19

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