In: Finance
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 %?
$ 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 | |||||