Assume Gillette Corporation will pay an annual dividend of $0.65 one year from now. Analysts expect this dividend to

Question

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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Assume Gillette Corporation will pay an annual dividend of $0

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Archived Solution

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