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%?
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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 $
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