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 $1.35 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?

Answer 1

Answer:

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