Question

Assume Gillette Corporation will pay an annual dividend of $0.64 one year from now. Analysts expect this dividend to grow at 11.2% per year thereafter until the 6th 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 8.4%​?

Answer 1

we have to use dividend discount model to compute the terminal value
Price today is the present value of future cash flow
i	ii	iii=i+ii	iv	v	vi=iv*v
year	Dividend	Terminal value	total cash flow	PVIF @ 8.4%	present value
1	0.6400		0.64	0.9225	0.59
2	0.7117		0.71	0.8510	0.61
3	0.7914		0.79	0.7851	0.62
4	0.8800		0.88	0.7242	0.64
5	0.9786		0.98	0.6681	0.65
6	1.0882	17.06	18.15	0.6163	11.19
Price =					14.29
Terminal value = Divided in year 7/(required rate - growth rate)
		1.0882*101.9%/(8.4%-1.9%)
		17.06
Price today =					$        14.29