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http: /courses aplia com af sen et quiz?qur_action-take uz&quiz; eEconomics question quiziquiz Aplia: Student Question Chegg c Previous Net2 Options X Find: Previous Next Options Graded Assignment | Read ChapterBack to Assignmen Due Wednesday 04.13.16 at 10:45 PM Attempts: Keep the Highest: 3 6. 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: (rs - g) If you were analyzing the consumer goods industry, for which kind of company in the industry would the constant growth model work best? O Mature companies with relatively predictable earnings All companies O Young companies with unpredictable earnings Walter Utilities is a dividend-paying company and is expected to pay an annual dividend of $1.25 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 $29.00 per share, what is the expected rate of return? 8.54% 7.71% 8.91% 12.81% Walter's dividend is expected to grow at a constant growth rate of 8.50% per year, what do you expect to happen to Walter's expected dividend yield in the future? O It will increase. O It will stay the same. O It will decrease Flash Player WIN 20,0,0,228 Q3 3.34 2004-2016 Aplia. All rights reserved. © 2013 Cengage Learning except as noted. All rights reserved. Session 59:40 Timeout Grade It Now Save & Continue 12:42 PM 4/8/2016Explanation / Answer
(1) Constant growth model suits best those firms who are mature & have predictable earnings (So that the value of g can be unchanged over a period of time).
(2)
Stock price = $29 = $1.25 / (r - 0.085)
r - 0.085 = 1.25 / 29
r - 0.085 = 0.043
r = 0.043 + 0.085 = 0.1281, or 12.81%
(3) Dividend yield = Dividend (in dollar) / Share price
As dividend grows, Dividend yield will increase.
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