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morpeh [17]
3 years ago
15

Walter Utilities is a dividend-paying company and is expected to pay an annual dividend of $0.65 at the end of the year. Its div

idend is expected to grow at a constant rate of 9.50% per year. If Walter’s stock currently trades for $12.00 per share, what is the expected rate of return?
Business
1 answer:
Anastaziya [24]3 years ago
7 0

Answer:

14.90%

Explanation:

We know,

Current stock price, P_{0} = \frac{D_{1}}{r_{s} - g}

Given,

Current stock price, P_{0} = $12.00

growth rate, g = 9.50% = 0.095

Expected annual dividend, D_{1} = $0.65

We have to determine the expected rate of return (r_{s}).

Putting the values into the above formula, we can get,

Current stock price, P_{0} = \frac{D_{1}}{r_{s} - g}

or, $12.00 = $0.65 ÷ (r_{s} - 0.095)

or, $12.00 × (r_{s} - 0.095) = $0.65

or, r_{s} - 0.095 = $0.65 ÷ $12.00

or, r_{s} - 0.095 = 0.0542

or, r_{s} = 0.054 + 0.095

Therefore, r_{s} = 0.149

The expected rate of return = 0.149 or 14.90%

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