Question

Carnes Cosmetics Co.'s stock price is $63.39, and it recently paid a $2.50 dividend. This dividend is expected to grow by 20% for the next 3 years, then grow forever at a constant rate, g; and rs = 13%. At what constant rate is the stock expected to grow after Year 3? Round your answer to two decimal places. Please do not round until the end! If a calculator is used, please tell me the process.

Answer 1

D1=(2.5*1.2)=3

D2=(3*1.2)=3.6

D3=(3.6*1.2)=4.32

Value after year 3=(D3*Growth Rate)/(Required rate-Growth rate)

=(4.32*(1+Growth rate)/(0.13-Growth rate)

Current price=Future dividends*Present value of discounting factor(rate%,time period)

63.39=3/1.13+3.6/1.13^2+4.32/1.13^3+(4.32*(1+Growth rate)/(0.13-Growth rate)/1.13^3

63.39=8.468172018+2.993976701(1+Growth rate)/(0.13-Growth rate)

(63.39-8.468172018)/2.993976701=(1+Growth rate)/(0.13-Growth rate)

(1+Growth rate)/(0.13-Growth rate)=18.34410667

1+Growth rate=18.34410667*(0.13-Growth rate)

1+Growth rate=2.384733868-18.34410667 Growth rate

Growth rate=(2.384733868-1)/(1+18.34410667)

=7.16%(Approx).