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%

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cancinodavidq cancinodavidq · Answer 1 · 2019-12-26T15:16:32+01:00

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.

Parrain Parrain · Answer 2 · 2022-04-05T13:42:51+02:00

Based on the current stock price, and other factors, the expected rate of return would be b. 13.82%.

We can find this by substituting the value into the Gordon Growth Model:

Share price = Next dividend / (Expected rate of return - Growth rate)

Solving gives:

28 = 2.05 / (R - 6.5%)

R - 6.5% = 2.05 / 28

R = 7.32% + 6.5%

= 13.82%

Find out more on the Gordon Growth Formula at https://brainly.com/question/13999870.