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:

P0P0

= =

D1(rs gL)D1rs gL

Which of the following statements is true?

Increasing dividends may not always increase the stock price, because less earnings may be invested back into the firm and that impedes growth.

Increasing dividends will always decrease the stock price, because the firm is depleting internal funding resources.

Increasing dividends will always increase the stock price.

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 6.50% per year. If Walters stock currently trades for $12.00 per share, what is the expected rate of return?

6.66%

19.68%

23.58%

7.78%

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 companys growth rate needs to change as the company matures.

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