Purchase Solution

Dividend-Discount Model and Decomposing Equity Cost of Capital

Not what you're looking for?

Ask Custom Question

1. Assume Gillette Corporation will pay an annual dividend of $0.64 one year from now. Analysts expect
this dividend to grow at 11.2% per year thereafter until the fifth year. After then, growth will level
off at 2.2% 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 8.5%?

The value of Gilletee's stock is $____ round to the nearest cents

2. Anle Corporation has a current stock price of $24.04, is expected to pay a dividend of $0.90 in one year, and
its expected price right after paying that dividend is $26.06.

A. What is Anle's equity cost of capital?

B. How much of Anle's equity cost of capital is expected to be satisfied by dividend yield and how much capital gain?

The portions of Anle's equity cost of capital is that expected to be satisfied by dividend yield is %____ (round to two decimals places)

The portions of Anle's equity cost of capital is that expected to be satisfied by capital gains is %____(round to two decimals places)

Purchase this Solution
Solution Summary

This solution first illustrates how to use the Dividend-Discount Model to compute a stock's price. It then illustrates how to compute the company's equity cost of capital and decompose it into its dividend yield and capital gain components.

Purchase this Solution
Free BrainMass Quizzes
Business Ethics Awareness Strategy

This quiz is designed to assess your current ability for determining the characteristics of ethical behavior. It is essential that leaders, managers, and employees are able to distinguish between positive and negative ethical behavior. The quicker you assess a person's ethical tendency, the awareness empowers you to develop a strategy on how to interact with them.

Transformational Leadership

This quiz covers the topic of transformational leadership. Specifically, this quiz covers the theories proposed by James MacGregor Burns and Bernard Bass. Students familiar with transformational leadership should easily be able to answer the questions detailed below.

Motivation

This tests some key elements of major motivation theories.

IPOs

This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)

Understanding the Accounting Equation

These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.

View More Free Quizzes
Related BrainMass Solutions

  • Calculate Dividend Growth Rate

    Assuming the current market price of the company's ordinary share is £28.40 and its opportunity cost of capital is 12½%, calculate the dividend growth rate, g.

  • Stock Value Using CAPM and DDM

    = $25.93 This solution calculates Stock Value using Capital Asset Pricing Model (CAPM) and Dividend Discount Model (DDM) with step-by-step workings and all formulas shown in excel file.

  • Constant growth valuation formula for stocks

    Capital gains yield= 6% (Given) Using the Dividend Discount (Constant Growth) Model Po= D1/ (rs-g) Dividend for next year= D1 = $1.50 Cost of equity= rs= 12.00% growth rate of dividends/earnings

  • Multiple choice questions

    in the dividend-discount model Only when Free Cash Flow to Equity is calculated that we use the firm's equity cost of capital. : C.

  • The Dividend Discount Model and the CAPM

    581824 The Dividend Discount Model and the CAPM CAPM and Cost of Equity Estimation 1) What is your opinion to the questions below?

  • Colgate-Palmolive Company

    If Colgate's equity cost of capital is 8.5% per year and its dividend payout ratio remains constant, what price does the dividend-discount model predict Colgate stock should sell for?

  • Stock valuation

    b) to implement the corporate valuation model, we discount projected free cash flows at the cost of equity capital.

  • Cost of equity

    We calculate cost of equity as the average value of cost of equity calculated using dividend discount method and CAPM Using Dividend Discount Model Cost of equity = r = Do (1+g) / Price + g

  • Dividend discount model - value of Gillette stock

    Applying the dividend discount model, what is the value of a share of Gillette stock if the firm's equity cost of capital is 8%? Please see the attached file.

View More Related Solutions