Eastern Electric currently pays a dividend of $1.83 per share and sells for $33 a share.

If investors believe the growth rate of dividends is 2% per year, what rate of return do they expect to earn on the stock?
Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places

To find the expected rate of return on the stock, we can use the **Dividend Discount Model (DDM)**, also known as the **Gordon Growth Model**. The formula is:

\[
r = \frac{D_1}{P_0} + g
\]

Where:
- $ r $ is the expected rate of return
- $ D_1 $ is the dividend expected next year
- $ P_0 $ is the current price of the stock
- $ g $ is the growth rate of dividends

### Step 1: Calculate the dividend expected next year ($ D_1 $)

The current dividend is $1.83, and it's expected to grow at a rate of 2% per year. So, the dividend next year will be:

\[
D_1 = D_0 \times (1 + g) = 1.83 \times (1 + 0.02) = 1.83 \times 1.02 = 1.8666
\]

### Step 2: Use the Gordon Growth Model to calculate the expected rate of return

Now, we can plug the values into the formula:

\[
r = \frac{1.8666}{33} + 0.02 = 0.056565 + 0.02 = 0.076565
\]

### Step 3: Convert the result to a percentage

\[
r = 0.076565 \times 100 = 7.66\%
\]

Thus, the expected rate of return is **7.66%**.

Would you like more details or have any questions?

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Here are 5 related questions you might want to explore:
1. How does the growth rate of dividends affect the expected return?
2. What assumptions does the Dividend Discount Model rely on?
3. How would the expected return change if the stock price increases?
4. What happens to the rate of return if the growth rate increases to 3%?
5. How would decreasing the dividend payout impact the stock's valuation?

**Tip:** The Dividend Discount Model works best for companies with stable and predictable dividend growth rates.

Eastern Electric currently pays a dividend of $1.83 per share and sells for $33 a share. If investors believe the growth rate of dividends is 2% per year, what rate of return do they expect to earn on the stock? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.

Learn how to calculate the expected rate of return for Eastern Electric stock, which pays a dividend of $1.83 per share and sells for $33 a share. The solution involves the Dividend Discount Model (DDM) and assumes a 2% annual growth in dividends. A step-by-step solution is provided using key financial concepts such as the rate of return and growth rate.

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