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

question 8

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 the 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 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:

Perceptual Constancy

The tendency to perceive objects as the same even though the sensations produced by them may differ when, for example, they differ in position or distance.

Rectangle

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A phobia characterized by an excessive and irrational fear of high places.

Visual Cliff

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