Question

Eastern Electric currently pays a dividend of about $1.95 per share and sells for $32 a share.

a.If investors believe the growth rate of dividends is 4% per year, what is the opportunity cost of capital? (Do not round intermediate calculations. Round your answer to 2 decimal places.)Cost of Capital%

b.If investors' opportunity cost of capital is 12%, 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 4% and the plowback ratio is .2, what must be the return on equity ROE? (Round your answer to 2 decimal places.)ROE%

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

B C D -NM Last Dividend Current Price of Stock $1.95 $32.00 a. If, Growth rate of dividends Opportunity Cost of Capital 4.00% 10.34% 8 b. Cost of Capital 9 Growth rate 12% 5.57% 10 11 c. Growth rate 12 Plowback ratio Return on Equity (ROE) 4% 0.2 20.00%

Cell reference -

B 1.95 Last Dividend Current Price of Stock 32 5 a. mo If, Growth rate of dividends Opportunity Cost of Capital 0.04 =((C2*(1+C5)/(3)+C5 0.12 =(C3*C8-C2)/(C3+C2) 8 b. Cost of Capital 9 Growth rate 10 11 c. Growth rate 12 Plowback ratio 13 Return on Equity (ROE) 0.04 0.2 =C11/012 14 15 16

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.