Question

Assume Gillette Corporation will pay an annual dividend of

$0.63

one year from now. Analysts expect this dividend to grow at

12.4%

per year thereafter until the

5th

year.​ Thereafter, growth will level off at

2.2%

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

8.5%​?

Answer 1

Value of a share of stock $ 13.97

As per dividend discount method, current share price is the present value of future dividends.
Step-1:Present value of dividend of next 5 years
Year	Dividend	Discount factor	Present value
a	b	c=1.085^-a	d=b*c
1	$       0.63	0.9217	$       0.58
2	$       0.71	0.8495	$       0.60
3	$       0.80	0.7829	$       0.62
4	$       0.89	0.7216	$       0.65
5	$       1.01	0.6650	$       0.67
Total			$       3.12
Step-2:Calculation of terminal value of dividend at the end of 5 years
Terminal value	=	D5*(1+g)/(Ke-g)*DF5		Where,
	=	$    10.85		D5(Dividend of year 5)	=	$       1.01
				g (Growth rate in dividend)	=	2.2%
				Ke (Required return)	=	8.5%
				DF5 (Discount factor of year 5)	=	0.6650
Step-3:Sum of present value of future dividends
Sum of present value of future dividends	=	$       3.12	+	$    10.85
	=	$    13.97
So, Price of stock is		$    13.97