Question

Walter Utilities is a dividend-paying company and is expected to pay an annual dividend of $1.45 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 $15.00 per share, what is the expected rate of return?

Answer 1

Expected return in( %) =16.80 %

Step-by-step explanation:

The Dividend Valuation Model (DVM) is a technique used to value the worth of an asset.

According to this model, the value of an asset is the sum of the present values of the future cash flows would that arise from the asset discounted at the required rate of return.

If dividend is expected to grow at a given rate , the expected return on share can be determined as follows:

Ke=Do (1+g)/P + g

Do - dividend in the following year, Ke- requited rate of return , g- growth rate, P-price

DATA:

Do- 1.45

g- 6.5%

P- price

Ke = (1.45× (1.065)/15) + 0.065= 0.16795

Return in % = 0.16795 × 100 = 16.80 %

Return in( %) =16.80 %