Reference no: EM132109801

Question - Procter and Gamble (PG) has a June fiscal year-end. On June 30, 2006, analysts expected the company to pay $1.33 dividends per share in fiscal year 2007. The company's market beta is estimated to be 0.7. Assume that the risk-free rate is 5.7% and the market premium is 5%. During fiscal year 2006, the company's sales growth was 20.2%. However, analysis reveals that P&G's fiscal 2006 sales include eight months of sales from Gillette after its acquisition by P&G during 2006. Footnotes report pro forma sales that show what the income statement would have reported had Gillette's full-year sales been included in both 2005 and 2006-specifically, P&G's sales growth would have been 4.4%.

(a) Estimate P&G's cost of equity capital using the CAPM model.

(b) Using your rounded answer from (a), estimate P&G's intrinsic value using the DDM model assuming that dividends per share are projected at $1.33 per share after 2007. (Hint: Apply the DDM model with constant perpetuity.)

(c) On June 30, 2006, the stock of P&G was priced at $55.60 per share. Infer the market expectation about the future growth rate of P&Gs dividend using the DDM model with an increasing perpetuity and the rounded cost of equity capital computed in (a).