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Procter and Gamble? (PG) paid an annual dividend of $ 1.66 in 2009. You expect PG...

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Finance

Procter and Gamble? (PG) paid an annual dividend of $ 1.66 in2009. You expect PG to increase its dividends by 7.1 % per year forthe next five years? (through 2014), and thereafter by 2.8 % peryear. If the appropriate equity cost of capital for Procter andGamble is 8.7 % per? year, use the? dividend-discount model toestimate its value per share at the end of 2009.

The price per share is______?$ (round to the nearest cent).

?

Answer & Explanation Solved by verified expert
4.4 Ratings (788 Votes)

Required rate= 8.70%
Year Previous year dividend Dividend growth rate Dividend current year Horizon value Total Value Discount factor Discounted value
1 1.66 7.10% 1.77786 1.77786 1.087 1.6356
2 1.77786 7.10% 1.90408806 1.90408806 1.181569 1.61149
3 1.90408806 7.10% 2.039278312 2.039278312 1.284365503 1.58777
4 2.039278312 7.10% 2.184067072 2.184067072 1.396105302 1.5644
5 2.184067072 7.10% 2.339135835 40.756 43.09513583 1.517566463 28.39753
Long term growth rate (given)= 2.80% Value of Stock = Sum of discounted value = 34.8
Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
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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Procter and Gamble? (PG) paid an annual dividend of $ 1.66 in2009. You expect PG to increase its dividends by 7.1 % per year forthe next five years? (through 2014), and thereafter by 2.8 % peryear. If the appropriate equity cost of capital for Procter andGamble is 8.7 % per? year, use the? dividend-discount model toestimate its value per share at the end of 2009.The price per share is______?$ (round to the nearest cent).?

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