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18 July, 20:11

Carbohydrates Anonymous (CA) operates a chain of weight-loss centers for carb lovers. Its services have been in great demand in recent years and its profits have soared. CA recently paid an annual dividend of $1.35 per share. Investors expect that the company will increase the dividend by 20 % in each of the next three years, and after that they anticipate that dividends will grow by about 5 % per year. If the market requires an 11 % return on CA stock, what should the stock sell for today?

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  1. 18 July, 20:13
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    The value of the stock should be 22.5

    Explanation:

    Step 1. Consider the following formula to calculate the value o f the stock.

    Step 2. Solve. Value of stock = dividend / (required rate of return of investors - anticipated growth rate)

    1.35 / (11-6) % = 22.5
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