Question

Proctor and Gamble paid an annual dividend of $2.87 in 2018. You expect PG to increase its dividend by 7.8% per year for the next five years (through 2023), and thereafter by 2.6% per year. if the appropriate equity cost of capital for proctor and gamble is 8.7% per year, use the dividend-discount model to estimate its value per share at the end of 2018.

Answer 1

Year 1 dividend = 2.87 (1 + 7.8%) = 3.09386

Year 2 dividend = 3.09386 (1 + 7.8%) = 3.335181

Year 3 dividend = 3.335181 (1 + 7.8%) = 3.595325

Year 4 dividend = 3.595325 (1 + 7.8%) = 3.875761

Year 5 dividend = 3.875761 (1 + 7.8%) = 4.17807

Year 6 dividend = 4.17807 (1 + 2.6%) = 4.2867

Value at year 5 = D6 / required rate - growth rate

Value at year 5 = 4.2867 / 0.087 - 0.026

Value at year 5 = 4.2867 / 0.061

Value at year 5 = 70.27377

Value per share = 3.09386 / (1 + 0.087)^1 + 3.335181 / (1 + 0.087)^2 + 3.595325 / (1 + 0.087)^3 + 3.875761 / (1 + 0.087)^4 + 4.17807 / (1 + 0.087)^5 + 70.27377 / (1 + 0.087)^5

Value per share = $60.30