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Question: Assume Gillette Corporation will pay an annual dividend of $0.63 one year from now. Analysts expe...

Assume Gillette Corporation will pay an annual dividend of $0.63 one year from now. Analysts expect this dividend to grow at 12.5% per year thereafter until the 4th 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 8.8%?

The value of​ Gillette's stock is _________(Round to the nearest​ cent.)

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%	0.63		0.63	1.088	0.579
2	0.63	12.50%	0.70875		0.70875	1.183744	0.59874
3	0.70875	12.50%	0.79734375		0.79734375	1.287913472	0.6191
4	0.79734375	12.50%	0.897011719	14.352	15.24901172	1.401249858	10.88244
	Long term growth rate (given)=	2.40%			Value of Stock =	Sum of discounted value =	12.68

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