Question

# Carnes Cosmetics Co.'s stock price is \$60, and it recently paid a \$1.75 dividend. This dividend...

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.

 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

#### Earn Coins

Coins can be redeemed for fabulous gifts.