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

Question

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 D1 (rs 9) Which of the following statements is true? Increasing dividends will always increase the stock price. Increasing dividends will always decrease the stock price, because the firm is depleting internal funding resources Increasing dividends may not always increase the stock price, because less earnings may be invested back inta the firm and that impedes growth. Walter Utilities is a dividend-paying company and is expected to pay an annual dividend of $0.85 at the end of the year. Its dividend is expected to grow at a constant rate of 8.00% per year. If walter's stock currently trades for $29.00 per share, what is the expected rate of return? o 8.26% O 6.13% O 10.93% 8.0396

Explanation / Answer

Question - 1

Increase in dividend shall increase the price of the stock ----- true ( statement - 1)

Question - 2

P0 = D1 / ( Ke - g) = 0.85 / ( Ke - 0.08) = 29.00

ke = 0.85 / 29 * 100 + 8 = 10.93 % ......................final answer

Question - 3

Expected rate of return rs must be more than g. Otherwise we have negative denominator and result shall be meaning less with negative stock value.

So ....statement - 1 is true

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