Question

Assume Gillette Corporation will pay an annual dividend of $ 0.65 one year from now. Analysts expect this dividend to grow at 12.4% per year thereafter until the 4th 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 7.8%

Answer 1

Value of share = Present Value of expected Dividends

Till 4th year, dividends increase at 12.4%

From 5th year, dividends grow at the rate of 2.2%

Value of dividends from 5th year onwards is computed at 4th time period by the formula

V₄ = D₅ / (r - g)

The values can be obtained as shown in the table below.

Note that some cells containing "=" sign mean they are formulas for the cell right above them

t	0	1	2	3	4	5
Dividends		0.6500	0.7306	0.8212	0.9230	0.9433
			=0.65*1.124			=.923023*1.022
Value of Dividends after 4th year					16.8452
					=.943329/(.078-.022)
Discount Factor = 1.078^t	1	1.0780	1.1621	1.2527	1.3504
Total Cashflows	0	0.6500	0.7306	0.8212	17.7682
Present Value of cashflows	0	0.6030	0.6287	0.6555	13.1573
				NET PRESENT VALUE	15.0445

Hence, value of share = $15.04