Water utilities company is expected to pay annual dividends of $2.65 at the end

Question

Water utilities company is expected to pay annual dividends of $2.65 at the end of the year .its dividends is expected to grow at a constant rate of 6.50% per yeear. if water stock currently trades for $14.00.

What is the expected rate of return? 21.23%, 6.68%, 25.43%,7.92%

c which of these statement must be true for constant growth valuation formula to be useful?

a company growth rate needs to change as the company matures

b company growth rate cannot be zero growth stock

c the required rate of return must be greater than the long run growth rate

Explanation / Answer

Hi,

Please find the answer as follows:

Part A:

14 = 2.65/(Ke - .065)

14Ke - 14*.065 = 2.65

Ke = 25.43%

Part B

Option C is correct.

Thanks.

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