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Walter utilities is a dividend-paying company and is expected to pay an annual dividend of $2.45 at the end of the year. It’s Dividend is expected to grow at a constant rate of 6.50% per year. If Walters stock currently trades for $29.00 per share, what is the expected rate of return?

Respuesta :

Edufirst

Answer:

                 [tex]\large\boxed{\large\boxed{14.9\%}}[/tex]

Explanation:

The value of a stock equals the flow of the dividends discounted at the expected rate of return.

The formula to calculate the value of a stock when the dividends are expected to grow at a constant rate g, when the expected rate of return is r, is:

      [tex]Value=\frac{\text{dividend at the end of the first year}}{r-g}[/tex]

Here you know value = $29.00 per share, dividend at the end of the first year = $ 2.45 per share, constant rate at which the dividend is expected to grow r = 6.50%. Then, you can solve for r:

       [tex]r-g=\frac{\text {dividend at the end of the first year}}{value}\\ \\ r=g+\frac{\text {dividend at the end of the first year}}{value}[/tex]

Substitute:

        [tex]r=6.50\%+$2.45/$29.00=0.065+0.08448=0.14948=14.9\%[/tex]

Parrain

Based on the current stock price, the annual dividend, and the growth rate, the expected rate of return is 14.95%.

What is the expected rate of return?

This can be found by the Gordon Growth Model:

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

Solving gives:

29 = 2.45 / ( R - 6.50%)

R - 6.50% = 2.45 / 29

R = 0.0845 + 0.065

= 14.95%

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