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Gillette's most recent annual dividend was $8 per share. The company expects the growth of its...

Question:

Gillette's most recent annual dividend was $8 per share. The company expects the growth of its dividends to be stable at 3% per year going forward.

a) If investors require a 9% return, what is the current value of Gillette's stock?

b) If the stock currently trades at $116.57 per share, what is the dividend growth rate investors expect?

Dividend Growth Rate:

The dividend growth rate is the rate at which the dividend from the stock is expected to grow or decline for the coming period. Under the constant growth model, the dividend is expected to grow at a constant rate to perpetuity. The dividend growth rate need not be constant usually which means it can be increasing or decreasing depending on the performance of the company.

Answer and Explanation:


Answer:

a) Gillette's stock's current value is $137.33.

Explanation:

As per the data:

  • Last dividend, D0 = $8
  • Constant growth rate,g = 3%
  • Required return, r = 9%
  • Current stock price, P0 =?

Computation:

  • P0 = D0 * (1 + g) / (r - g)
  • P0 = $8 * (1 + 3%) / (9% - 3%)
  • P0 = $137.33

b) The dividend growth rate expected by the investors is 2%.

Explanation:

  • P0 = D0 * (1 + g) / (r - g)
  • $116.57 = $8 * (1 + g) / (9% - g)
  • 10.49 - 116.57g = $8 + 8g
  • g = 2.49 / 124.57
  • g = 2%

Learn more about this topic:

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The Dividend Growth Model

from Finance 101: Principles of Finance

Chapter 14 / Lesson 3
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