Question

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 dividend 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?

Answer 1

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%