Financial Management: Theory & Practice
16th Edition
ISBN: 9781337909730
Author: Brigham
Publisher: Cengage
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Transcribed Image Text:Expected returns, dividends, and growth The constant growth valuation formula has dividends
in the numerator. Dividends are divided by the difference between the required return and
D₁
1
Which of the following statements is
(r-gL)
dividend growth rate as follows: widehat(P)
true? Increasing dividends will always decrease the stock price, because the firm is depleting
internal funding resources. Increasing dividends will always increase the stock price. Increasing
dividends may not always increase the stock price, because less earnings may be invested
back into the firm and that impedes growth. Walter Utilities is a dividend - paying company and
is expected to pay an annual dividend of $2.05 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 $22.00 per
share, what is the expected rate of return? 8.84%
=
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