Question

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%?

Answer 1

	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