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

question 102

Multiple Choice

Carlson Products, a constant growth company, has a current market (and equilibrium) stock price of $20.00.Carlson's next dividend, , 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:

Normal Distribution

A bell-shaped frequency distribution curve where most of the occurrences take place near the mean and fewer and fewer occur as one moves away from the mean.

Symmetric

Characterizing shapes or distributions that are mirrored equally around a central point, line, or axis.

Bell-Shape

Describing the graphical shape of a normal distribution curve, which is symmetrical and centered around the mean, tapering off on each side.

Standard Normal

Standard normal refers to a normal distribution with a mean of 0 and a standard deviation of 1.