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 thereafter until the fifth year. After then, 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

Thus The value of share is Po =15.07 $

Explanation:

Given data:

• Annual dividend =  $0.65
• % increase per year = 12%
• Level off grow = 2 %
• Firm's equity cost of capital = 8%

Solution:

Po = 0.65 / 1.08  + (0.65)(1.12)/ (1.08)^2 +(0.65)(1.12)/ (1.08)^3 + (0.65)(1.12)/ (1.08)^4 + (0.65)(1.12)/ (1.08)^5

Po = (0.65)(1.12)^4 (1.02) / (0.08 - 0.02) + 1.08^5

Po =15.07 $

Thus The value of share is Po =15.07 $