The constant dividend growth valuation model uses the value of a firms dividends in the numerator of the equation. Dividends are divided by the difference between investors required return and the dividend growth rate, as follows:

P0P0 = D1(rs g)D1rs g

Which of the following statements best describes how a change in a firms stock price would affect a stocks capital gains yield?

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

The capital gains yield on a stock that the investor already owns has an inverse relationship with the firms expected future stock price.

Consider the case of Walter Utilities:

Walter Utilities is a dividend-paying company and is expected to pay an annual dividend of $1.65 at the end of the year. Its dividend is expected to grow at a constant rate of 6.00% per year. If Walters stock currently trades for $19.00 per share, the average investor should expect to earn a return of

%. (Note: Round your answer to two decimal places.)

Which of the following conditions must hold true for the constant growth valuation formula to be useful and give meaningful results?

The companys stock cannot be a zero growth stock.

The required rate of return, rss, must be greater than the long-run growth rate.

The companys growth rate needs to change as the company matures.