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vichka [17]
4 years ago
11

Assume Gillette Corporation will pay an annual dividend of $ 0.68 one year from now. Analysts expect this dividend to grow at 12

.4 % per year thereafter until the 6th 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 8.6 %​? The value of​ Gillette's stock is ​$ nothing. ​(Round to the nearest​ cent.)
Business
1 answer:
Rufina [12.5K]4 years ago
3 0

Answer:

$16.25

Explanation:

According to the dividend discount model, the price of share is equal to the present value of all the dividends that it will receive in future,

Based on the above explanation, the price of share of the Gillette Corporation shall be determined as follows:

Present value of year 1 dividend=$ 0.68(1+8.6%)^-1=$0.63

Present value of year 2 dividend=$0.76(1+8.6%)^-2=$0.64

(0.68*1.124)

Present value of year 3 dividend=$0.85(1+8.6%)^-3=$0.66

(0.76*1.124)

Present value of year 4 dividend=$0.96(1+8.6%)^-4=$0.69

(0.85*1.124)

Present value of year 5 dividend=$1.08(1+8.6%)^-5=$0.71

(0.96*1.124)

Present value of year 6 dividend=$1.21(1+8.6%)^-6=$0.74

(1.08*1.124)

Present value of all dividends after year 6=              $12.18

[(1.21(1+2.4%))/(8.6%-2.4%)]/(1+8.6%)^-6

Price of share                                                               $16.25

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Definitions:

PVIFA - present value interest factor of annuity

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r = annual interest rate

n = number of years to payoff the debt

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