Carlson Products, a Constant Growth Company, Has a Current Market

question 50

Multiple Choice

Carlson Products, a constant growth company, has a current market (and equilibrium) stock price of $20.00. Carlson's next dividend, D1, is forecasted to be $2.00, and Carlson is growing at an annual rate of 6 percent.Carlson has a beta coefficient of 1.2, and a required rate of return on the market is 15 percent.As Carlson's financial manager, you have access to insider information concerning a switch in product lines which would not change the growth rate, but would cut Carlson's beta which would not change the growth rate, but would cut Carlson's beta coefficient in half.If you buy the stock at the current market price, what is your expected percentage capital gain?

• A)23%
• B)33%
• C)43%
• D)53%
• E)There would be a capital loss.

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Definitions:

Body Maturation

The physical and hormonal process of growth and development that leads to the attainment of sexual maturity and adult stature.

Multidirectional

Describes development or change that can proceed in multiple directions, indicating variability and non-linearity in processes or growth.

Compensate

To make up for something undesired by exerting an effort or offering something in return.

Cultivating

The process of trying to acquire or develop a quality, sentiment, or skill.