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

14.90%

Step-by-step explanation:

We know,

Current stock price,
`P_(0)` =
`(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)` =
`(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%