Question

Assume Gillette Corporation will pay an annual dividend of $0.63 one year from now. Analysts expect this dividend to grow at 11.5% per year thereafter until the 4th year.​ Thereafter, growth will level off at 1.7% per year. According to the​ dividend-discount model, what is the value of a share of Gillette stock if the​ firm's equity cost of capital is 8.7%​?

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Answer 1

Value of Share = Present Value of Dividends + Present Value of Price at Year 4

= $ 2.40943123716885 + $ 9.08803284957873  

= $ 11.50

Answer = $ 11.50

Note:

Present Value of Dividends

Year	Dividend	Discounting Factor(8.7%)	Present Value
1	0.63	0.919963201471941	0.579576816927323
2	0.70245	0.846332292062503	0.594506118559305
3	0.78323175	0.778594564914907	0.609819983618791
4	0.87330340125	0.716278348587771	0.625528318063433
Present Value of Dividends	2.40943123716885

Price at Year 4 = Expected Dividend in Year 5 / (required return - growth rate)

= (0.87330340125 *1.017)/(8.7%-1.7%)

= $ 12.6878508438750

Present Value of Price at Year 4 = Price at Year 4 * Present Value of Discounting Factor(8.7%)

= $ 12.6878508438750 * 0.716278348587771

= $ 9.08803284957873