General Mills (NYSE: GIS) is a large manufacturer and distributor of package con

Question

General Mills (NYSE: GIS) is a large manufacturer and distributor of package consumer food products. Benoit Gagnon, a buy-side analyst covering General Mills, has studied the historical growth rates in sales, earnings, and dividends for GIS, and also has made projections of future growth rates. Gagnon expects the current dividend of 1.10 per share to grow at 6 percent for the next five years, and that the growth rate will decline to 3 percent and remain at that level thereafter. The risk- free rate is 4%, the market risk premium is 6%, and GIS's beta, assumed to be .50.

a. calculate the required rate of reutrn on equity for general mills as of the beg. yr 1

b. calculate the sum of the present value of toal dividends for years 1 through 5

c. calculate the continuing value of general mills at the start of year 6 + using the constant growth model with year 6+ total dividends.

d. calculate the present value of continuing value as the beg of yr 1

5. compute the value per share of general mills as thhe beg of yr 1. remember to adjust the present value for midyear discounting

Explanation / Answer

Inputs: Risk free rate 4% Market risk premium 6% Beta 0.5 D0 1.1 Growth for first five years 6% Growth thereafter 3% Solution: a. Return on Equity 7.00% b. Year Dividend PV @ 7% Present Value 1 1.166 0.935 1.090 2 1.236 0.873 1.080 3 1.310 0.816 1.069 4 1.389 0.763 1.059 5 1.472 0.713 1.050 Present Value 5.347702539 c. Dividend for the 6th year 1.489 Present Value 37.231 d. Present value of continuing value 26.545

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