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Assume Gillette Corporation will pay an annual dividend of $0.65 one year from now. Analysts expect...

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Finance

Assume Gillette Corporation will pay an annual dividend of $0.65one year from now. Analysts expect this dividend to grow at 12% peryear until the 5th year. Thereafter, growth will level off at 2%per year. According to the dividend-discount model, what is thevalue of a share of Gillette stock if the firm's equity cost ofcapital is 8%?

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3.9 Ratings (710 Votes)

Required rate= 8.00%
Year Previous year dividend Dividend growth rate Dividend current year Horizon value Total Value Discount factor Discounted value
1 0 0.00% 0.65 0.65 1.08 0.6019
2 0.65 12.00% 0.728 0.728 1.1664 0.62414
3 0.728 12.00% 0.81536 0.81536 1.259712 0.64726
4 0.81536 12.00% 0.9132032 0.9132032 1.36048896 0.67123
5 0.9132032 12.00% 1.022787584 17.387 18.40978758 1.469328077 12.52939
Long term growth rate (given)= 2.00% Value of Stock = Sum of discounted value = 15.07
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 5 *(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 $0.65one year from now. Analysts expect this dividend to grow at 12% peryear until the 5th year. Thereafter, growth will level off at 2%per year. According to the dividend-discount model, what is thevalue of a share of Gillette stock if the firm's equity cost ofcapital is 8%?

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