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18 September, 08:51

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?

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  1. 18 September, 09:09
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    The expected rate of return is 14.29%.

    Explanation:

    The re-arranged equation of DDM for Expected Rate of Return is given below:

    Expected Rate = (Next Year Dividend / Current Stock Price) + Growth Rate

    where

    Next Year Dividend is Current Year Dividend * (1 + growth rate)

    ⇒ Next Year Dividend = 2.05 * (1 + 6.50%) = $2.18.

    All the other values are given in the question. Simply put those values in the equation:

    ⇒ Expected Rate of Return = (2.18 / 28) +.065 =.1429 = 14.29%.
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Home » Business » 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.
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