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.

---

Definitions:

Insight

The capacity to gain an accurate and deep understanding of someone or something, often leading to a new perspective.

Issue

A problem, challenge, or situation that requires resolution or attention.

Important Skill

A capability or proficiency that is deemed valuable and necessary in a specific context or job.

Executives

Executives are high-ranking officials in a corporation or organization, responsible for making major decisions and guiding the company's strategic direction.