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: Po = - D1 (rs - 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 7.50% per year. If Walter's stock currently trades for $17.00 per share, what is the expected rate of return? 18.38% 7.60% 8.43% 13.88% O Which of the following statements will always hold true? It will never be appropriate for a rapidly growing startup company that pays no dividends at present-but is expected to pay dividends at some point in the future-to use the constant growth valuation formula. The constant growth valuation formula is not appropriate to use for zero growth stocks. The constant growth valuation formula is not appropriate to use unless the company's growth rate is expected to remain constant in the future.

Answer 1

1st part :

1st statement is correct.

The capital gains yield on a stock that the investor already owns has a direct relationship with the firm's expected future stock price.

2nd part:

18.38%.

expected return = (dividend / price) + growth rate

=>($1.85 /17) + 0.075

=>0.10882353+0.075

=>0.18382353

=>18.38%.

3rd part:

3rd option.

The constant growth valuation formula is not appropriate to use unless the company's growth rate is expected to remain constant in the future.