Eastern Electric’s recent annual dividend was $164 per share and its stock currently sells for about $27 per 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?
b. If investors’ required rate of return is 10%, what must be the growth rate they expect of the firm?
c. If the sustainable growth rate is 5% and the plow· back ratio is .4, what must be the rate of return earned by the firm on its new investments?