Question

Assume Gillette Corporation will pay an annual dividend of $ 0.64 one year from now. Analysts expect this dividend to grow at 11.7 % per year thereafter until the 6th 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 8.9 %​?

The value of​ Gillette's stock is

​(Round to the nearest​ cent.)

Answer 1

The share price of Gillette Corporation is:

D1 = $0.64

D2 = $0.7149

D3 = $0.7985

D4 = $0.8919

D5= $0.9963

D6 = $1.1129

D7 = $1.1374

P6 = D7/ Re - G

= $1.1374/0.089- 0.022

=$1.1374/0.067

=$16.9761

The price of the stock today is :

= $0.64/1.089 + 0.7149/1.089^2 + 0.7985/1.089^3 + 0.8919/1.089^4 + 0.9963/1.089^5 + 1.1129/1.089^6 + $16.9761/1.089^6

=0.5877 + 0.6028 + 0.6183 + 0.6342 + 0.6505 + 0.6673 + 10.1782

=$13.9389

= $13.94 (rounded off to two decimal places)