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Rate of return, growth rate, return on equity

Eastern Electric currently pays a dividend of about $1.72 per share and sells for $31 a share.

a. If investors believe the growth rate of dividends is 3% per year, what rate of return do they expect to earn on the stock? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Rate of return _______%

b. If investors' required rate of return 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.)

Growth rate _________ %

c. If the sustainable growth rate is 7% and the plowback ratio is .5, what must be the rate of return earned by the firm on its new investments? (Round your answer to 2 decimal places.)

Rate of return __________ %

Solution Preview

a. If investors believe the growth rate of dividends is 3% per year, what rate of return do they expect to earn on the stock? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Rate of return _______%

Price = Next dividend / (Required rate of return - growth rate)
$31 = ($1.72*1.03)/(Required rate of return - ...

Solution Summary

This solution illustrates how to compute a stock's rate of return, growth rate, and return on equity.

$2.19