Dividend-Discount Model and Decomposing Equity Cost of Capital

. 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

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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) 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.

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