Walter Utilities is a dividend-paying company and is expected to pay an annual dividend of $0.65 at the end of the year. Its dividend is expected to grow at a constant rate of 9.50% per year. If Walter’s stock currently trades for $12.00 per share, what is the expected rate of return?

14.90%

Explanation:

We know,

Current stock price, =

Given,

Current stock price, = $12.00

growth rate, g = 9.50% = 0.095

Expected annual dividend, = $0.65

We have to determine the expected rate of return ().

Putting the values into the above formula, we can get,

Current stock price, =

or, $12.00 = $0.65 ÷ ( - 0.095)

or, $12.00 × ( - 0.095) = $0.65

or, - 0.095 = $0.65 ÷ $12.00

or, - 0.095 = 0.0542

or, = 0.054 + 0.095

Therefore, = 0.149

The expected rate of return = 0.149 or 14.90%

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