Question
In: Finance
Assume Gillette Corporation will pay an annual dividend of $0.65 one year from now. Analysts expect...
Assume Gillette Corporation will pay an annual dividend of $0.65 one year from now. Analysts expect this dividend to grow at 12% per year until the 5th year. Thereafter, growth will level off at 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%?
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Expert Solution
| Required rate= | 8.00% | ||||||
| Year | Previous year dividend | Dividend growth rate | Dividend current year | Horizon value | Total Value | Discount factor | Discounted value |
| 1 | 0 | 0.00% | 0.65 | 0.65 | 1.08 | 0.6019 | |
| 2 | 0.65 | 12.00% | 0.728 | 0.728 | 1.1664 | 0.62414 | |
| 3 | 0.728 | 12.00% | 0.81536 | 0.81536 | 1.259712 | 0.64726 | |
| 4 | 0.81536 | 12.00% | 0.9132032 | 0.9132032 | 1.36048896 | 0.67123 | |
| 5 | 0.9132032 | 12.00% | 1.022787584 | 17.387 | 18.40978758 | 1.469328077 | 12.52939 |
| Long term growth rate (given)= | 2.00% | Value of Stock = | Sum of discounted value = | 15.07 |
| 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 5 *(1+long term growth rate)/( Required rate-long term growth rate) | |||
| Discount factor=(1+ Required rate)^corresponding period | |||
| Discounted value=total value/discount factor | |||
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