Investors demand a rate of return of 15 percent on Sweet Life Food Inc.’s common shares. These shares are currently trading at $20 per share. Dividend payout for the current year is expected to be $1 per share.
a. What is the implied long-term growth rate that shareholders expect?
b. If, because of a recession, the dividend growth rate is projected to be 0, what will be the new share value?
c. Conversely, if, because of a booming economy, investors reassess their growth expectations to 15 percent per year, what will happen to the market price of Sweet Life Food's common shares?

  • CreatedFebruary 25, 2015
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