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Assume Gillette Corporation will pay an annual dividend of $ 0.65 one year from now. Analysts...

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 %​?

Solutions

Expert Solution

$ 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

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