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 = = D1rs−gD1rs−g
1. Which of the following statements is true?

A. Increasing dividends will always decrease the stock price, because the firm is depleting internal funding resources.
B. Increasing dividends will always increase the stock price.
C. Increasing dividends may not always increase the stock price, because less earnings may be invested back into the firm and that impedes growth.

2. Walter Utilities is a dividend-paying company and is expected to pay an annual dividend of $0.85 at the end of the year. Its dividend is expected to grow at a constant rate of 9.50% per year. If Walter’s stock currently trades for $20.50 per share, then the expected rate of return on the stock is:

A. 9.56%
B. 13.65%
C. 11.60%
D. 17.75%

3. Walter’s dividend is expected to grow at a constant growth rate of 9.50% per year. What do you expect to happen to Walter’s expected dividend yield in the future?

A. It will increase.
B. It will decrease.
C. It will stay the same.