Waterworks has a dividend yield of 5.50%. If its dividend is expected to grow at

Question

Waterworks has a dividend yield of 5.50%. If its dividend is expected to grow at a constant rate of 2.50%, what must be the expected rate of return on the company’s stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Waterworks has a dividend yield of 5.50%. If its dividend is expected to grow at a constant rate of 2.50%, what must be the expected rate of return on the company’s stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Explanation / Answer

Dividend yield = Dividend/Price

According to dividend discount model,

Price = Dividend/(Expected return - growth rate)

Expected rate of return = (Dividend/Price) + growth rate

= 5.5% + 2.5% = 8%

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