Question

Assume Gillette Corporation will pay an annual dividend of $0.62 one year from now. Analysts expect this dividend to grow at 12.6% per year thereafter until the 55th year.​ Thereafter, growth will level off at 2.3% 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 8.8%​?

Answer 1

	Required rate=	8.80%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	0	0.00%	0.62		0.62	1.088	0.5699
2	0.62	12.60%	0.69812		0.69812	1.183744	0.58976
3	0.69812	12.60%	0.78608312		0.78608312	1.287913472	0.61035
4	0.78608312	12.60%	0.885129593	13.931	14.81612959	1.401249858	10.57
	Long term growth rate (given)=	2.30%			Value of Stock =	Sum of discounted value =	12.34

Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Unless dividend for the year provided
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 4 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor