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home / study / business / finance / finance questions andanswers / assume gillette corporation will pay an annual dividendof $0.63 one year from now. analysts ...

Question: Assume Gillette Corporation will pay anannual dividend of $0.63 one year from now. Analysts expe...

Assume Gillette Corporation will pay an annual dividend of $0.63one year from now. Analysts expect this dividend to grow at 12.5%per year thereafter until the 4th year. Thereafter, growth willlevel off at 2.4% per year. According to the dividend discountmodel, what is the value of a share of Gillette stock if the firm'sequity cost of capital is 8.8%?

The value of? Gillette's stock is _________(Round to thenearest? cent.)

Answer & Explanation Solved by verified expert
3.6 Ratings (613 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% 0.63 0.63 1.088 0.579
2 0.63 12.50% 0.70875 0.70875 1.183744 0.59874
3 0.70875 12.50% 0.79734375 0.79734375 1.287913472 0.6191
4 0.79734375 12.50% 0.897011719 14.352 15.24901172 1.401249858 10.88244
Long term growth rate (given)= 2.40% Value of Stock = Sum of discounted value = 12.68
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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home / study / business / finance / finance questions andanswers / assume gillette corporation will pay an annual dividendof $0.63 one year from now. analysts ...Question: Assume Gillette Corporation will pay anannual dividend of $0.63 one year from now. Analysts expe...Assume Gillette Corporation will pay an annual dividend of $0.63one year from now. Analysts expect this dividend to grow at 12.5%per year thereafter until the 4th year. Thereafter, growth willlevel off at 2.4% per year. According to the dividend discountmodel, what is the value of a share of Gillette stock if the firm'sequity cost of capital is 8.8%?The value of? Gillette's stock is _________(Round to thenearest? cent.)

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