1) Eastern Electric currently pays a dividend of about $1.78 per share and sells for $27 a share. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

a. If investors believe the growth rate of dividends is 4% per year, what rate of return do they expect to earn on the stock? Rate of return __ %

b. If investors' required rate of return is 15%, what must be the growth rate they expect of the firm? Growth rate __ %

c. If the sustainable growth rate is 2% and the plowback ratio is .1, what must be the rate of return earned by the firm on its new investments? Rate of return __%

2) You believe that the Non-stick Gum Factory will pay a dividend of $1 on its common stock next year. Thereafter, you expect dividends to grow at a rate of 5% a year in perpetuity. If you require a return of 12% on your investment, how much should you be prepared to pay for the stock?

3)

Here are data on two stocks, both of which have discount rates of 10%:

	Stock A			Stock B
Return on equity		10	%		8	%
Earnings per share	$	1.20		$	1.50
Dividends per share	$	.60		$	.60

(The earnings per share and the dividends per share represent Year 0 values.)

a.	What are the dividend payout ratios for each firm? (Enter your answers as a percent rounded to 2 decimal places.)

	Stock A	Stock B
Dividend payout ratios	%	%

b.	What are the expected dividend growth rates for each firm? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

	Stock A	Stock B
Expected dividend growth rates	%	%

c.	What is the proper stock price for each firm? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Stock A

Stock B

Stock price

$

$

---

4)

No-Growth Industries pays out all of its earnings as dividends. It will pay its next $4 per share dividend in a year. The discount rate is 11%.

a.	What is the price-earnings ratio of the company? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

P/E ratio

b.	What would the P/E ratio be if the discount rate were 10%? (Round your answer to 2 decimal places.)

P/E ratio