Assume Gillette Corporation will pay an annual dividend of $ 0.62 one year from now. Analysts expect this dividend to grow at 12.5 % per year thereafter until the 5th 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 8.8 %?
The value of Gillette's stock is ? (Round to the nearest cent.)
P0 = PV of CFs from it.
Div Calculation:
Year | CF | Formula | Calculation |
1 | $ 0.62 | Given | |
2 | $ 0.70 | D1(1+g) | 0.62*1.125 |
3 | $ 0.78 | D2(1+g) | 0.70*1.125 |
4 | $ 0.88 | D3(1+g) | 0.78*1.125 |
5 | $ 0.99 | D4(1+g) | 0.88*1.125 |
6 | $ 1.02 | D5(1+g) | 0.99*1.024 |
P5 = D6 / [ Ke - g ]
= 1.02 / [ 8.8% - 2.4% ]
= 1.02 /6.4%
= 15.94
P0:
Year | CF | PVF @8.8% | Dsic CF |
1 | $ 0.62 | 0.9191 | $ 0.57 |
2 | $ 0.70 | 0.8448 | $ 0.59 |
3 | $ 0.78 | 0.7764 | $ 0.61 |
4 | $ 0.88 | 0.7136 | $ 0.63 |
5 | $ 0.99 | 0.6559 | $ 0.65 |
5 | $ 15.94 | 0.6559 | $ 10.46 |
Price of Stock | $ 13.51 |
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