Question

assume Gillette corporation will pay an annual dividend of $0.61 one year from now analysts expect the dividend to grow at 12.9% per year thereafter until the 6th year. thereafter the growth will level off at 1.5% per year according to the dividend discount model what is the value of Gillette stock if the firm's equity cost of capital is 8.7%

Answer 1

We would calculate value of stock using dividend discount model
The value of stock is equal to present value of dividend payment up to year 6 plus terminal value at end of year 6
Year	Dividend		Discount factor @ 8.7%	Present value
1	$0.61		0.9200	$0.56
2	$0.69	0.61*(1.129)	0.8463	$0.58
3	$0.78	0.69*(1.129)	0.7786	$0.61
4	$0.88	0.78*(1.129)	0.7163	$0.63
5	$0.99	0.88*1.129	0.6589	$0.65
6	$1.12	0.99*1.129	0.6062	$0.68
6	$15.77	(1.12*1.015)/(0.087-0.015)	0.6062	$9.56
Stock price				$13.27
Thus, value of stock is $13.27