Assume Gillette Corporation will pay an annual dividend of $0.61 one year from now. Analysts expect this dividend togrow at 11.5% per year thereafter until the 6th year. Thereafter, growth will level off at 2.3% per year. According tothe dividend-discount model, what is the value of a share of Gillette stock if the firm's equity cost of capital is 8.4%?The value of Gillette's stock is $(Round to the nearest cent.)

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EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter7: Common Stock: Characteristics, Valuation, And Issuance

Section: Chapter Questions

Problem 12P

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Assume Gillette Corporation will pay an annual dividend of $0.61 one year from now. Analysts expect this dividend to
grow at 11.5% per year thereafter until the 6th year. Thereafter, growth will level off at 2.3% 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 8.4%?
The value of Gillette's stock is $
(Round to the nearest cent.)

Expert Solution

Step 1: Introduction:

The constant growth model is a stock valuation method used in finance to determine a stock's intrinsic value based on dividends. The model assumes that dividend growth will continue at a steady rate. It might not be appropriate for businesses with unpredictable dividend payout schedules, and the correctness of the model depends on the consistency of the growth rate assumption. This concept only applies to dividends with a constant growth rate. Or, more precisely, it is only relevant for stocks of companies with stable growth rates in dividends per share.

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