Question

Assume Gillette Corporation will pay an annual dividend of $ 0.67 one year from now. Analysts expect this dividend to grow at 12.4 % per year thereafter until the 4 th year.​ Thereafter, growth will level off at 2.1 % 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 %?

Answer 1

Answer = $ 14.32

Note:

Value = Present Value of Dividends + Present Value of Price at Year 4

= $11.42+2.90

= $ 14.32

Present Value of Price at Year 4 =[ Expected Dividend in year 5 / (Required return -growth rate)] * Discounting Factor (rate, time)

= [(1.07*1.021)/(8.9%-2.1%)]* 0.7110309102419350

= $ 11.42

Present Value of Dividends :

Year	Dividend	Discounting Factor(8.9%)	Present Value
0	0.67
1	0.75	0.9182736455463730	0.69
2	0.85	0.8432264881050260	0.71
3	0.95	0.7743126612534670	0.74
4	1.07	0.7110309102419350	0.76
Present Value of Dividends			2.90