Question

Gillette Corporation will pay an annual dividend of $ 0.68 one year from now. Analysts expect this dividend to grow at 12.7 % per year thereafter until the 6th year. Thereafter, growth will level off at 1.7 % per year. According to the dividend discount model, what is the value of a Gillette share if the firm's equity cost of capital is 7.9 %?

Answer 1

Dividend:
D1		0.68
D2	0.68+12.7%	0.77
D3	0.77+12.7%	0.86
D4	0.86+12.7%	0.97
D5	0.97+12.7%	1.1
D6	1.1+12.7%	1.24
D7	1.24+1.7%	1.26
Horizon value at Year-6 = 1.26 / (7.9-1.7)% =20.32
Share price
Year	Cashflows	PVF at 7.90%	Present value
1	0.68	0.926784	0.630213
2	0.77	0.858929	0.661375
3	0.86	0.796041	0.684596
4	0.97	0.737758	0.715626
5	1.1	0.683743	0.752117
6	1.24	0.633682	0.785766
6	20.32	0.633682	12.87642
Stock price			17.11
Answer is $ 17.11