Question

Assume Gillette Corporation will pay an annual dividend of $ 0.67 one year from now. Analysts expect this dividend to grow at 11.2 % per year thereafter until the 5th year.​ Thereafter, growth will level off at 2.2 % 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 7.6 %​? The value of Gillete's stock is___

Answer 1

According to DDM,

Value of a stock = Present value of all future dividends and terminal value discounted at cost of capital.

Year	Dividend	Present Value
1	0.67	0.67/(1+0.076)^1=0.62267
2	0.67*1.112^1 =0.74504	0.74504/(1+0.076)^2= 0.64351
3	0.67*1.112^2 =0.82848	0.82848/(1+0.076)^3=0.66504
4	0.67*1.112^3 =0.92127	0.92127/(1+0.076)^4=0.68729
5	0.67*1.112^4 =1.024458	1.024458/(1+0.076)^5= 0.71029
Terminal Value for year 5	19.3888	19.3888/(1+0.076)^5= 13.44279

The terminal value for year 5 = D5 *(1+g) / (r-g) = 1.024458 * (1+0.022)/(0.076-0.022) = 19.3888

Value of stock = 0.62267 + 0.64351 + 0.66504 + 0.68729 + 0.71029 + 13.44279

= 16.77 Answer

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