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1) 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 the 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 plowback ratio is .4, what must be the rate of return earned by the firm on its new investments?
2) Bond Pricing. A 6-year Circular File bond pays interest of $80 annually and sells for $950. What is its coupon rate, current yield, and yield of maturity?
3) Coupon Rate. General Matter's outstanding bond issue has a coupon rate of 10 percent and a current yield of 9.6 percent, and it sells at a yield to maturity of 9.25 percent. The firm wishes to issue additional bonds to the public at par value. What coupon rate must the new bonds offer in order to sell at par?
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Answers to 3 questions on returns on stocks and bonds:
1) Rate of return, growth rate, return on new investments on stocks.
2) Coupon rate, current yield, and yield of maturity of a bond
3) Coupon rate on a bond so that it sells at par
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