Question

Procter and Gamble (PG) paid an annual dividend of $1.76 in 2009. You expect PG to increase its dividends by 8.2% per year for the next five years (through 2014), and thereafter by 2.7% per year. If the appropriate equity cost of capital for Procter and Gamble is 8.6% per year, use the dividend-discount model to estimate its value per share at the end of 2009. The price per share is $ . (Round to the nearest cent.)

Answer 1

D0 = $1.76

D1 = $1.9043

D2= $2.0605

D3= $2.2294

D4= $2.4122

D5= $2.6101

P5 = D6/ Re - g

= $2.6101*1.0207/0.086 - 0.0207

=$2.6641 / 0.0653

= $40.7979

So, the share price at the end of 2009 is :

= $1.9043/1.086 + $2.0605/1.086^2 + $2.2294/1.086^3 + $2.4122/1.086^4 +($2.6101 + $40.7979)/1.086^5

= $35.71

= $36 ( rounded off to the nearest cents)