Walter Utilities is a dividend-paying company and is expected to pay an annual dividend of $1.25 at the end of the year. Its dividend is expected to grow at a constant rate of 6.00% per year. If Walter’s stock currently trades for $16.00 per share, what is the expected rate of return?

The expected rate of return on a stock can be calculated using the dividend growth model, also known as the Gordon Growth Model. The formula for the Gordon Growth Model is:

Expected Rate of Return = Dividend Yield + Dividend Growth Rate

Given:

Annual dividend expected at the end of the year (D1) = $1.25

Dividend growth rate (g) = 6.00% or 0.06 (as a decimal)

Current stock price = $16.00

First, let's calculate the dividend yield, which is the dividend expected at the end of the year divided by the current stock price:

Dividend Yield = Dividend / Stock Price

Dividend Yield = 1.25 / 16.00

Dividend Yield = 0.078125

Now, calculate the expected rate of return using the dividend yield and the dividend growth rate:

Expected Rate of Return = Dividend Yield + Dividend Growth Rate

Expected Rate of Return = 0.078125 + 0.06

​Expected Rate of Return = 0.138125

Convert the expected rate of return to a percentage:

Expected Rate of Return = 13.81%

Therefore, the expected rate of return on Walter Utilities' stock is approximately 13.81%.