Question

Procter and Gamble​ (PG) paid an annual dividend of $ 2.87 in 2018. You expect PG to increase its dividends by 8.0 % per year for the next five years​ (through 2023), and thereafter by 3.0 % per year. If the appropriate equity cost of capital for Procter and Gamble is 8.0 % per​ year, use the​ dividend-discount model to estimate its value per share at the end of 2018.

Answer 1

Answer:

$73.47

Explanation:

2.87 is the current dividend paid (D0)

Use that to find dividends for the next 5 years;

D1 = D0(1+g) ; g being the growth rate

D1 = 2.87(1.08) = 3.0996

D2 = 3.0996(1.08) = 3.3476

D3 =3.3476(1.08) = 3.6154

D4 = 3.6154(1.08) = 3.9046

D5 = 3.9046(1.08) = 4.2170

Next, find terminal cashflows;

D6 (yr 2024) = 4.2170 (1.03) = 4.3435

Find Present values of all the dividends using the 8% discount rate with the formula; PV = FV/$(1+r)^{n}$

PV(D1) = 2.87

PV(D2) = 2.87

PV(D3) = 2.87

PV(D4)= 2.87

PV(D5)= 2.87

PV of terminal value; PV(D6 onwards) = $\frac{\frac{4.3435}{(0.08-0.03)} }{1.08^{5} }$  = 59.1223

Sum up the PVs to find value per share;

$2.87 +$2.87 +$2.87 +$2.87 +$2.87+ $59.1223 = $73.47