4. Expected returns, dividends, and growth Aa Aa The constant growth valuation f

Question

4. Expected returns, dividends, and growth Aa Aa The constant growth valuation formula has dividends in the numerator. Dividends are divided by the difference between the required return and dividend growth rate as follows: D1 (rs - g) Po- Which of the following statements best describes how a change in a firm's stock price would affect a stock's capital gains yield? O The capital gains yield on a stock that the investor already owns has a direct relationship with the firm's expected future stock price. O The capital gains yield on a stock that the investor already owns has an inverse relationship with the firm's expected future stock price. Walter Utilities is a dividend-paying company and is expected to pay an annual dividend of $2.45 at the end of the year. Its dividend is expected to grow at a constant rate of 8.50% per year. If Walter's stock currently trades for $26.00 per share, what is the expected rate of return? O 17.92% O 12.82% O 9.40% O 8.59%

Explanation / Answer

4.

first option market is correct

as there is direct relation between capital gains yield and future stock price.

5.

expected rate of return

=(D1/P)+growth rate

=(2.45/26)+8.50%

=17.92%

the above is the answer

6.

the constant growth model is not appropriate unless a company's growth rate is expected to remain constant in the future.

the above all are the answers

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