Question

Eastern Electric currently pays a dividend of about $1.65 per share and sells for $30 a share. 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?

Answer 1

To calculate the rate of return that investors expect to earn on a stock, we can use the dividend growth model. In this case, Eastern Electric pays a dividend of $1.65 per share and sells for $30 a share. If investors believe the growth rate of dividends is 4% per year, the expected rate of return would be 9.5%.

Step-by-step explanation:

To calculate the rate of return that investors expect to earn on a stock, we can use the dividend growth model. The dividend growth model calculates the expected rate of return by dividing the expected dividend by the current stock price and adding the expected growth rate of dividends.

In this case, Eastern Electric pays a dividend of $1.65 per share and sells for $30 a share. If investors believe the growth rate of dividends is 4% per year, the formula would be:

Rate of Return = (Expected Dividend / Current Stock Price) + Growth Rate of Dividends

Rate of Return = ($1.65 / $30) + 0.04

Rate of Return = 0.055 + 0.04

Rate of Return = 0.095 or 9.5%