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Assume Gillette Corporation will pay an annual dividend of $0.62 one year from now. Analysts expect...

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Finance

Assume Gillette Corporation will pay an annual dividend of $0.62one year from now. Analysts expect this dividend to grow at 12.6%per year thereafter until the 55th year.? Thereafter, growth willlevel off at 2.3% per year. According to the? dividend-discountmodel, what is the value of a share of Gillette stock if the?firm's equity cost of capital is 8.8%??

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4.2 Ratings (860 Votes)

Required rate= 8.80%
Year Previous year dividend Dividend growth rate Dividend current year Horizon value Total Value Discount factor Discounted value
1 0 0.00% 0.62 0.62 1.088 0.5699
2 0.62 12.60% 0.69812 0.69812 1.183744 0.58976
3 0.69812 12.60% 0.78608312 0.78608312 1.287913472 0.61035
4 0.78608312 12.60% 0.885129593 13.931 14.81612959 1.401249858 10.57
Long term growth rate (given)= 2.30% Value of Stock = Sum of discounted value = 12.34
Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Unless dividend for the year provided
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 4 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor

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Assume Gillette Corporation will pay an annual dividend of $0.62one year from now. Analysts expect this dividend to grow at 12.6%per year thereafter until the 55th year.? Thereafter, growth willlevel off at 2.3% per year. According to the? dividend-discountmodel, what is the value of a share of Gillette stock if the?firm's equity cost of capital is 8.8%??

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