Carnes Cosmetics Co.'s stock price is $74.81, and it recently paid a $1.75 dividend. This dividend is expected to grow by 27% 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. Do not round your intermediate calculations.
Price = P0= 74.81
D0 = 1.75
Growth = 27% for 3 years
rs=13%
Hence Dividends are
D1= 1.75*127% = 2.2225
D2= 2.2225* 127% = 2.822575
D3= 2.822575* 127%= 3.58467
D4= 3.58467* 127% = 4.552531
Stock price is the discounted dividends + Horizon value
Horizon value = P3 = D4/(rs-g)
Hence
74.81 = 2.2225/ 1.13^1 + 2.822575/1.13^2 + 3.58467/1.13^3 + 4.552531/ (0.13-g)
74.81=6.661661+ 4.552531/ (0.13-g)
4.552531/ (0.13-g)= 68.14834
0.13-g= 0.066803
g=0.063197
Growth = 6.32%
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