Question

Assume Gillette Corporation will pay an annual dividend of $ 0.65 one year from now. Analysts expect this dividend to grow at 11.9 % per year thereafter until the 6th year.​ Thereafter, growth will level off at 2.4 % 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 7.3 %​?

Answer 1

$ 19.66

As per dividend discount model, current share price is the present value of future dividends which is calculated as follows:
Step-1:Present value of dividend of non-constant growth stage
Year	Last dividend	Current Dividend	Discount factor	Present Value
a	b	c=b*1.1190	d=1.073^-a	e=c*d
1		$       0.65	0.931966	$       0.61
2	$       0.65	$       0.73	0.868561	$       0.63
3	$       0.73	$       0.81	0.80947	$       0.66
4	$       0.81	$       0.91	0.754399	$       0.69
5	$       0.91	$       1.02	0.703075	$       0.72
6	$       1.02	$       1.14	0.655242	$       0.75
	Total			$       4.05
Step-2:Present Value of dividend of constant growth period
Present Value	=	D6*(1+g)/(Ke-g)*DF6
	=	$    15.62
Where,
D6	=	$       1.14
g	=	2.4%
Ke	=	7.3%
DF6	=	0.655242
Step-3:Sum of present value of future dividends
Sum of present value of dividends	=	$       4.05	+	$    15.62
	=	$    19.66