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Homework answers / question archive / Assume Gillette Corporation will pay an annual dividend of $0

Assume Gillette Corporation will pay an annual dividend of $0

Finance

Assume Gillette Corporation will pay an annual dividend of $0.65 one year from now. Analysts expect this dividend to questions grow at 12.4% per year thereafter until the 4th 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 8.3%? The value of Gillette's stock is (Round to the nearest cent.) you stuc

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Year Cash flows    
  Calculation Solution Present value factor @ 8.3% Present value
1   0.65 0.923361034 0.60
2 0.65*(1+12.4%)^1 0.7306 0.852595599 0.62
3 0.65*(1+12.4%)^2 0.8211944 0.787253554 0.65
4 0.65*(1+12.4%)^3 0.923022506 0.726919256 0.67
4 0.65*(1+12.4%)^3*(1+2.4%)/(8.3%-2.4%) 16.01991603 0.726919256 11.65
      Value of stock 14.19

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