Question 1

Eastern Electric currently pays a dividend of about $1.64 per share and sells for $27 a share.

1. If investors believe the growth rate of dividends is 3% per year, what rate of return do they expect to earn on the stock?
2. If investors required rate of return is 10%, what must be the growth rate they expect?
3. If the sustainable growth rate is 5% and the plowback ratio is 0.4, what must the rate of return earned by the firm on its new investments?