Walter Utilities is a dividend-paying company and is expected to pay an annual dividend of $1.45 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 $21.00 per share, what is the expected rate of return

The expected rate of return on the stock is 15.90%

Explanation:

The price of a stock that is expected to pay a dividend that grows at a constant rate forever can be calculated using the constant growth model of Dividend discount model (DDM) approach. The DDM values a stock based on the present value of the expected future dividends. The formula for price today under this model is,

P0 = D1 / r - g

Where,

We already know the D1, the price today and the growth rate. Plugging in these values in the formula, we can calculate the expected rate of return.

21 = 1.45 / (r - 0.09)

21 * (r - 0.09) = 1.45

21r - 1.89 = 1.45

21r = 1.45 + 1.89

r = 3.34 / 21

r = 0.1590 or 15.90%

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