Question

Assume Gillette Corporation will pay an annual dividend of $0.68 one year from now. Analysts expect this dividend to grow at 11.4% per year thereafter until the sixth year.​ Thereafter, growth will level off at 1.7% per year. According to the​ DDM, what is the value of a share of Gillette stock if the​ firm's equity cost of capital is 8.6%​?

The value of Gillette's stock is $_______.

Answer 1

D1=0.68

D2=(0.68*1.114)=0.75752

D3=(0.75752*1.114)=0.84387728

D4=(0.84387728*1.114)=0.94007929

D5=(0.94007929*1.114)=1.04724833

D6=(1.04724833*1.114)=1.16663464

Value after year 6=(D6*Growth rate)/(Equity cost of capital-Growth rate)

=(1.16663464*1.017)/(0.086-0.017)

=17.1951801

Hence current value=Future dividend and value*Present value of discounting factor(rate%,time period)

=0.68/1.086+0.75752/1.086^2+0.84387728/1.086^3+0.94007929/1.086^4+1.04724833/1.086^5+1.16663464/1.086^6+17.1951801/1.086^6

=$14.49(Approx)