Ask Question
30 November, 18:27

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%?

+2
Answers (1)
  1. 30 November, 19:25
    0
    In order to find Gillette's value of a share we need to use the multi stage model and find what will its dividend be at the end of the 5th year

    The dividend of the first 5 years can be calculated by multiplying the previous one by 1.12

    Dividend 1 year from now = 0.65

    Dividend 2 years from now = 0.65*1.12=0.728

    Dividend 3 years from now=0.728*1.12=0.81536

    Dividend 4 years from now = 0.81536*1.12 = 0.913203

    Dividend 5 years from now=0.91320.*1.12 = 1.022788

    After this the growth level will be 2% so we can find the 6th years dividend by multiplying 1.022788 by 1.02 and we will get 1.043243

    Now we can calculate the share price will be after 5 years by using the DDM

    D1 / (R-G)

    D1 = 1.0432

    R = 0.08

    G = 0.02

    1.0432/0.06 = 17.38

    Now in order to find the current price we need to discount this price to find the present value we can do this by using its cost of capital as the discount rate.

    17.38/1.08^5

    =12.98735
Know the Answer?
Not Sure About the Answer?
Get an answer to your 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 ...” in 📙 Business if there is no answer or all answers are wrong, use a search bar and try to find the answer among similar questions.
Search for Other Answers