Carbohydrates Anonymous (CA) operates a chain of weight-loss centers for carb lo
ID: 2709863 • Letter: C
Question
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 $1.40 per share. Investors expect that the company will increase the dividend by 20 percent in each of the next three years, and after that they anticipate that dividends will grow by about 5 percent per year. If the market requires an 11 percent return on CA stock, what should the stock sell for today?
Explanation / Answer
Calculation of the stock price as on today D0= 1.4 D1 = 1.4*120% 1.68 D2 = 1.68*120% 2.016 D3 = 2.02*120% 2.424 D4 = 2.424*105% 2.5452 1.68 0.900901 1 1.513514 2.02 0.811622 1 1.639477 2.42 0.731191 1 1.769483 2.55 0.7311 16.66667 31.07175 Price as on today 35.99422
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