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Sofia Garcia is a buy-side analyst for a large pension fund. She frequently uses dividend discount models such as the Gordon growth model for the consumer noncyclical stocks that she covers. The current dividend for Procter & Gamble Co. (NYSE: PG) is $1.46 and the dividend 8 years ago was $0.585. The current stock price is $80.
A. What is Procter & Gamble's historical annual dividend growth rate?
B. Garcia believes that the future annual dividend growth rate will be exactly half of the historical rate. Using the Gordon growth model, what is her expected rate of return on Procter & Gamble's stock?
C. Garcia actually does not agree with the answer from part B above. Based on a market analysis of Procter & Gamble's competitors, she believes that the stock's required rate of return actually is 7.53%. If Garcia continues to assume that the future dividend growth rate will be exactly half of the historical rate, what is her estimate of the fair value of the stock using the Gordon growth model?
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