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