Question 1. Constant-Growth Model. Waterworks has a dividend yield of 8 percent. If its dividend is expected to grow at a constant rate of 5 percent, what must be the expected rate of return on the company's stock?
Question 2. Rate of Return. Steady As She Goes, Inc., will pay a year-end dividend of $2.50 per share. Investors expect the dividend to grow at a rate of 4 percent indefinitely.
a. If the stock currently sells for $25 per share, what is the expected rate of return on the stock?
b. If the expected rate of return on the stock is 16.5 percent, what is the stock price?