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Unilever will start to pay an annual dividend of $0
Unilever will start to pay an annual dividend of $0.85 next year. Analysts then expect this dividend to grow at 10% per year until the end of year five. Thereafter growth will level off at 3% per year forever. According to the dividend-discount model, what is the value of a share of Unilever stock if the firm’s equity cost of capital is 6%?
Expert Solution
Formula for example
Value of Unilever Stock is as follows -
(0.85(1.1))/(1.06) +
0.85(1.1)^2/1.06^2 +
0.85(1.1)^3/1.06^3 +
0.85(1.1)^4/1.06^4 +
0.85(1.1)^5/1.06^5 +
(((0.85(1.1)^5)*0.03)/(0.06-0.03))/1.06^5
= 0.80 + 0.83 + 0.86 + 0.90 + 0.93 + 31.93
= $36.25
Hence the cost of Unilever stock is $36.25.
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