Vicente Garcia is a buy-side analyst for a large pension fund. He frequently uses dividend discount models such as the Gordon growth model for the consumer noncyclical stocks that he covers. The current dividend for Procter & Gamble Co. (NYSE: PG) is $1.46, and the dividend eight years ago was $0.585. The current stock price is $80.00.
A. What is the historical dividend growth rate for Procter & Gamble?
B. Garcia assumes that the future dividend growth rate will be exactly half of the historical rate. What is Procter & Gamble”s expected rate of return using the GGM?
C. Garcia uses a beta of 0.53 (computed versus the S&P 500 index) for Procter & Gamble. The risk-free rate of return is 5.56 percent and the equity risk premium is 3.71 percent. If Garcia continues to assume that the future dividend growth rate will be exactly half of the historical rate, what is the value of the stock with the Gordon growth model?
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