Question

Assume Gillette Corporation will pay an annual dividend of $ 0.64 one year from now. Analysts expect this dividend to grow at 12.9 % per year thereafter until the sixth year.​ Thereafter, growth will level off at 1.9 % 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 8.2 %​? The value of​ Gillette's stock is ​$

Answer 1

D1 = $0.64

D2 = $0.64 * (1.129) = $0.72256

D3 = $0.72256 * (1.129) = $0.81577

D4 = $0.81577*(1.129) = $0.921

D5 = $0.921 * (1.129) = $1.039814

D6 = $1.039814 * 1.129 = $1.17395

Terminal value = $1.17395 * 1.019 / (0.082 - 0.019) = $18.98812

value of stock today = present value of cash flows from the stock

present value of cash flows from the stock = [$0.64/(1.082)¹] + [$0.72256/(1.082)²] + [$0.81577/(1.082)³] + [$0.921/(1.082)⁴] + [$1.039814/(1.082)⁵] + [$1.17395/(1.082)⁶] + [$18.98812/(1.082)⁶]

present value of cash flows from the stock = $15.79

So, value of the Gillette's stock = $15.79