Bond Bates
03/10/2024 · Senior High School
Young companies with unpredictable earnings 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 \( 9.00 \% \) per year. If Walter's stock currently trades for \( \$ 22.50 \) per share, then the expected rate of return on the stock is
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To calculate the expected rate of return on Walter Utilities' stock, we can use the Gordon Growth Model (also known as the Dividend Discount Model for a stock with constant growth). The formula for the expected rate of return \( r \) is given by:
\[
r = \frac{D_1}{P_0} + g
\]
where:
- \( D_1 \) is the expected dividend at the end of the year,
- \( P_0 \) is the current price of the stock,
- \( g \) is the growth rate of the dividend.
Given:
- \( D_1 = 2.25 \)
- \( P_0 = 22.50 \)
- \( g = 0.09 \) (or \( 9\% \))
Now, we can plug in the values:
1. Calculate the dividend yield:
\[
\frac{D_1}{P_0} = \frac{2.25}{22.50} = 0.1 = 10\%
\]
2. Now, add the growth rate to the dividend yield:
\[
r = 0.1 + 0.09 = 0.19 = 19\%
\]
Thus, the expected rate of return on Walter Utilities' stock is **19%**.
Quick Answer
The expected rate of return on Walter Utilities' stock is 19%.
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