Question

Carnes Cosmetics Co.'s stock price is $43, and it recently paid a $2.00 dividend. This dividend is expected to grow by 16% for the next 3 years, then grow forever at a constant rate, g; and r_s = 12%. At what constant rate is the stock expected to grow after Year 3? Do not round intermediate calculations. Round your answer to two decimal places

Answer 1

Answer :

Stock Price = Year1 dividend / (1 + r) + year2 dividend / (1 + r)^2 + year3 dividend / (1 + r)^3 + year3 dividend * (1 + Growth ) / ( rs - Growth )

$ 43 = 2.00 * 1.16 / 1.12 + 2.00 * 1.16^2 / (1.12)^2 + 2.00 * 1.16^3 / (1.12)^3 + 2.00 * 1.16^3 * ( 1 + growth ) / [ ( 12% - growth ) * ( 1 + r )^3 ]

$ 43 = $ 2.07 + $ 2.15 + $ 2.22 + $ 3.12 * ( 1 + growth ) / [ ( 12% - growth ) * ( 1.12 )^3 ]

$ 36.56 * ( 12% - growth ) * 1.12^3 = 3.12 * ( 1 + growth )

$ 4.39 - $ 36.56 * growth = 2.22 + 2.22 * growth

38.78 * Growth = 2.17

Growth rate = 5.60%.