Question

Eastern Electric currently pays a dividend of $1.69 per share and sells for $24 a share.

If investors' required rate of return is 12%, what must be the growth rate they expect of the firm?

Answer 1

The growth rate that investors must expect for the firm is approximately 19.04%.

Step-by-step explanation:

The formula for finding the growth rate of a firm is:

Growth Rate = (Dividends per Share / Stock Price) + Expected Dividend Growth Rate

In this case, the dividends per share is $1.69 and the stock price is $24, so the first part of the formula is:

(1.69 / 24)

To find the expected dividend growth rate, we'll use the required rate of return. The required rate of return is 12%, so the second part of the formula is:

0.12

Now we can calculate the growth rate:

0.0704 + 0.12 = 0.1904

So, the investors must expect a growth rate of approximately 19.04% for the firm.