Question

Assume Gillette Corporation will pay an annual dividend of $ 0.68 one year from now. Analysts expect this dividend to grow at 11.6 % per year thereafter until the 5th year.​ Thereafter, growth will level off at 1.9 % 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 7.8 %​?

Answer 1

value of a share of Gillette stock is $15.90
Statement showing Current Price
Particulars	Time	PVf 7.8%	Amount	PV
Cash inflows (Dividend)	1.00	0.9276	0.6800	0.63
Cash inflows (Dividend)	2.00	0.8605	0.7589	0.65
Cash inflows (Dividend)	3.00	0.7983	0.8469	0.68
Cash inflows (Dividend)	4.00	0.7405	0.9452	0.70
Cash inflows (Dividend)	5.00	0.6869	1.0548	0.72
Cash inflows (Price)	5.00	0.6869	18.2175	12.51
value of a share of Gillette stock				15.90
P5 = D6/ke-g
P5 = 1.0548*1.019/(7.8%-1.9%)
P5 = 1.0748/(5.9%)
P5 = 18.2175