Question

Walter Utilities is a dividend-paying company and is expected to pay an annual dividend of $2.05 at the end of the year. Its dividend is expected to grow at a constant rate of 6.50% per year. If Walter’s stock currently trades for $28.00 per share, what is the expected rate of return?
a. 704.91%
b. 13.82%
c. 992.14%
d. 656.87%

Answer 1

Answer:

Please find the detailed answer as follows:

Explanation:

1)  Given D1 = $ 2.05

Constant growth rate, g= 6.5% per year

Current Price of the stock, Ps = $ 28 per share

Let the cost of capital be "k'

Then , 28 = D1*(1+g)/(k - 6.5%)  

28 = 2.05*(1+6.5%)/ (k - 6.5%)

k = 14%

2)  Dividend yield = (Dividend /Price)

As the dividends are growing at constant rate, the Stock price is expected to be Div(1+g)/(k-g) . Yield = (k-g)/(1+g), as g and k remains constant.

Thus Answer is It will stay the same.