Assume Gillette Corporation will pay an annual dividend of $ 0.68 one year from now. Analysts expect this dividend to grow at 12.4 % per year thereafter until the 6th year. Thereafter, growth will level off at 2.4 % 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 8.6 %? The value of Gillette's stock is $ nothing. (Round to the nearest cent.)

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ijaz4308 ijaz4308 · Answer 1 · 2020-02-21T14:39:33+01:00

Answer:

$16.25

Explanation:

According to the dividend discount model, the price of share is equal to the present value of all the dividends that it will receive in future,

Based on the above explanation, the price of share of the Gillette Corporation shall be determined as follows:

Present value of year 1 dividend=$ 0.68(1+8.6%)^-1=$0.63

Present value of year 2 dividend=$0.76(1+8.6%)^-2=$0.64

(0.68*1.124)

Present value of year 3 dividend=$0.85(1+8.6%)^-3=$0.66

(0.76*1.124)

Present value of year 4 dividend=$0.96(1+8.6%)^-4=$0.69

(0.85*1.124)

Present value of year 5 dividend=$1.08(1+8.6%)^-5=$0.71

(0.96*1.124)

Present value of year 6 dividend=$1.21(1+8.6%)^-6=$0.74

(1.08*1.124)

Present value of all dividends after year 6= $12.18

[(1.21(1+2.4%))/(8.6%-2.4%)]/(1+8.6%)^-6

Price of share $16.25