Question

Assume Gillette Corporation will pay an annual dividend of $0.67 one year from now. Analysts expect this dividend to grow at 12.7% per year thereafter until the 66th year.​ Thereafter, growth will level off at 1.8% 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 7.1%​?

Answer 1

Expected Dividend at the end of Year 1 = D1 = $ 0.67, Annual Growth Rate 1 = g1 = 12.7 % and this growth rate continues for the next 66 years. Perpetual Constant Growth Rate post Year 66 = g2 = 1.8 % and Equity Cost of Capital = r = 7.1 %

P1 = Present Value of Dividends between Year 1 to Year 66 = 0.67 x [1/(0.071 - 0.127)] x [1-{(1.127)/(1.071)}^(66)] = $ 155.896

P2 = Present Value of Perpetual Constant Growth Dividends Beyond Year 66 = [0.67 x (1.127)^(66) x 1.018 / (0.071 - 0.018)] x [1/(1.071)^(66)] = $ 371.895

Value of Gillette Share = P1 + P2 = 155.896 + 371.895 = $ 527.791 ~ $ 527.79