Question
Procter and Gamble (P&G) is one of the leading global product companies, owning some of the most valuable brands in the world. P&Gs long history
Procter and Gamble (P&G) is one of the leading global product companies, owning some of the most valuable brands in the world. P&Gs long history of payment of dividends makes it good candidate for the dividend discount model. We assume that the company will deliver good growth in the next few years before it stabilizes to a steady steady-state rate. Assume that P&G reported $12,736 million in earnings for 2010 and paid out 49.74% of these earnings as dividends. On a per share basis, earnings were $3.82 and dividends were $1.92 in 2010. Assume the stock beta of 0.90, a risk-free rate of 3.5%, and a mature market equity-risk premium of 5% to estimate the cost of capital. Consider that the stock beta would rise to 1 after year 5. The firms current return on equity is 20.09% with a payout ratio of 49.74%. It is expected the P&G would continue to maintain this return on equity and payout ratio in the next five years. After year 5, assume that P&G will be in stable growth, growing at 3% a year. Further assume that the long-term return on equity would be 12% and the payout ratio would rise to 75% in perpetuity. Required: Estimate the market value of P&Gs equity following the two-stage dividend discount model and showing the following details. i. Cost of equity capital and the long-term growth in dividends after 2015. ii. Forecast dividends for the first five years and the terminal value of the stock at the end of 2015. iii. Market value of the stock at the beginning of 2011.
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