The constant growth valuation formula has dividends in the numerator. Dividends
ID: 2745003 • Letter: T
Question
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: P_0 = D_1/(r_s - g) Which of the following statements best describes how a change in a firm's stock price would affect a stock's capital gains yield? The capital gains yield on a stock that the investor already owns has a direct relationship with the firm's expected future stock price. 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 $1.85 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 $25.00 per share, what is the expected rate of return? 9.74% 11.00% 9.07% 16.40% Walter's dividend is expected to grow at a constant growth rate of 9.00% per year. What do you expect to happen to Walter's expected dividend yield in the future? It will stay the same. It will decrease. It will increase.Explanation / Answer
The correct choice is A
Explanation : Capital gains yield is the capital gain during the given year divided by the beginning price and it bears a direct relationship with the firms expected future stock price. If current price is P1 and beginning price is P0 , expected capital gains yield = (P1 -P0 )/ P0
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The correct choice is D
P0 = D / ( r - g)
$ 25 = $ 1.85 /( r - 0.09)
25r - 2.25 = 1.85
r = 0.164
r = 16.40%
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The correct choice is A
Explanation : For a constant growth stock, the expected dividend yield is constant .
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