Investors demand a rate of return of 15 percent on Sweet Life Food Inc.s common shares. These

Question:

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?

Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...