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:

P0

=

D1rsg

If you were analyzing the consumer goods industry, for which kind of company in the industry would the constant growth model work best?

Mature companies with relatively predictable earnings

All companies

Young companies with unpredictable earnings

Walter Utilities is a dividend-paying company and is expected to pay an annual dividend of $0.65 at the end of the year. Its dividend is expected to grow at a constant rate of 9.00% per year. If Walters stock currently trades for $16.00 per share, then the expected rate of return on the stock is?

a)11.10%

b)9.14%

c)16.98%

d)13.06%

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, rs

, must be greater than the long-run growth rate.