Walter Utilities is a dividend-paying company and is expected to pay an annual d

Question

Walter Utilities is a dividend-paying company and is expected to pay an annual dividend of $2.25 at the end of the year. Its dividend is expected to grow at a constant rate of 8.00% per year. If water's stock currently trades for $30.00 per share, what is the expecte rate of return? ? 8.68% ? 8.07% 10.70% ? 15.50% Walter's dividend is expected to grow at a constant growth rate of 8.00% per year, what do you expect to happen to Walter's expected dividend yield in the future? O It will increase. O It will decrease. O It will stay the same. Flash Player WIN 30,0,0,113 3 334.1 2004-2016 Aplia. All rights reserved 13 Cengage Learning except as noted. All rights reserved Grade It Now Save & Continue

Explanation / Answer

As per CAPM,

P0 = D1/ Ke-g or Ke = D1/P0 + g

Ke = $2.25/$30 + 8%

Ke = .075 + .08 = .155 or 15.5% ans D

It will stay the same,

Lets test :

Current dividend yield = 2.25/30 = 7.5%

If dividend grow by 8% for year 2 i.e. 2.25 x 1.08 = 2.43, and price increases to 32.40 [2.43/.155-.08 = 32.40] New dividend yield = 2.43/32.4 = 7.5%

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