Question

Carnes Cosmetics Co.'s stock price is $60, and it recently paid a $1.75 dividend. This dividend is expected to grow by 22% for the next 3 years, then grow forever at a constant rate, g; and rs = 11%. 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

Required rate= | 11.00% | |||||

Year | Previous year dividend | Dividend growth rate | Dividend current year | Discount factor | Discounted value | |

1 | 1.75 | 22.00% | 2.135 | 1.11 | 1.9234 | |

2 | 2.135 | 22.00% | 2.6047 | 1.232 | 2.1142 | |

3 | 2.6047 | 22.00% | 3.177734 | 1.368 | 2.32261 |

Where | |

Current dividend = | Previous year dividend*(1+growth rate)^corresponding year |

Discount factor= | (1+ Required rate)^corresponding period | |

Discounted value= | total value/discount factor |

horizon value = (current price-PV of dividends)*(1+required rate)^3

=(60-1.9234-2.1142-2.32261)*(1+0.11)^3=73.3594

horizon value= Dividend year 3* (1 + growth rate )/(cost of equity - growth rate) |

73.3594 = 3.177734 * (1+Growth rate) / (0.11 - Growth rate) |

Growth rate% = 6.39 |

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