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Assume Gillette corporation will pay an an annual dividend of $0.61

one year from now. Analysts expect this dividend to grow at 11.1%
per year thereafter until the 4th year. Thereafter, growth will
le

User Pooja Shah
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1 Answer

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To calculate the present value of the expected dividends, we can use the formula for the present value of a growing perpetuity. In this case, the dividends are expected to grow at a constant rate of 11.1% per year until the 4th year, and then grow at a constant rate of 4.5% thereafter.

Let's denote the annual dividend one year from now as D1 = $0.61. The growth rate until the 4th year is g1 = 11.1% = 0.111, and the growth rate after the 4th year is g2 = 4.5% = 0.045.

The present value of the expected dividends can be calculated as follows:

PV = D1 / (r - g1) + (D1 * (1 + g1)^1) / (r - g1)^2 + (D1 * (1 + g1)^2) / (r - g1)^3 + ... + (D1 * (1 + g1)^3 * (1 + g2)) / (r - g1)^4,

where r is the required rate of return.

Let's assume the required rate of return, r, is 8%.

PV = 0.61 / (0.08 - 0.111) + (0.61 * (1 + 0.111)^1) / (0.08 - 0.111)^2 + (0.61 * (1 + 0.111)^2) / (0.08 - 0.111)^3 + ... + (0.61 * (1 + 0.111)^3 * (1 + 0.045)) / (0.08 - 0.111)^4.

Now we can calculate the present value of the expected dividends using the above formula.

User Safakeskin
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