Question

Procter and Gamble(PG) paid an annual dividend of $1.77 in 2009. You expect PG to increase its dividends by 7.1% per year for the next five years(through 2014), and thereafter by 2.7%er year. If the appropriate equity cost of capital for Procter and Gamble is 8.2% per year, use the dividend-discount model to estimate its value per share at the end of 2009.

The price per share is _____(two decimal)

Answer 1

Solution:
	The price per share is $39.99
Working Notes:
	Using DDM
	The price per share P0 at end of 2009
	P0= D1/(1+r)^1 + D2/(1+r)^2+ D3/(1+r)^3+ D4/(1+r)^4+D5/(1+r)^5 + P5/(1+r)^5
	Here r = cost of equity = 8.2%=0.082
	D1 = D0 x (1+g)^1 = $1.77 x (1+.071)^1 = $1.89567
	D2 = D0 x (1+g)^2 = $1.77 x (1+.071)^2 = $2.0302626
	D3 = D0 x (1+g)^3 =$1.77 x (1+.071)^3= $2.1744112
	D4 = D0 x (1+g)^4 = $1.77 x (1+.071)^4 = $2.3287944
	D5 = D0 x (1+g)^5 = $1.77 x (1+.071)^5 = $2.4941388
	D6 =D0 x(1 + G) x (1+g)^5 = $1.77 x(1+ 0.027) x (1+.071)^5 = $2.5614806
	Constant growth model
	P5 = D6 / (Ke - G)
	= $2.5614805595/( 0.082 - 0.027)
	=$46.57237381
	P0= D1/(1+r)^1 + D2/(1+r)^2+ D3/(1+r)^3+ D4/(1+r)^4+D5/(1+r)^5 + P5/(1+r)^5
	P0= $1.89567/(1+0.082)^1 + $2.0302626/(1+0.082)^2+ $2.1744112/(1+0.082)^3+ $2.3287944/(1+0.082)^4+$2.4941388/(1+0.082)^5 + $46.57237381/(1+0.082)^5
	P0= 39.98822772
	P0= $39.99
Please feel free to ask if anything about above solution in comment section of the question.