Procter and Gamble (PG) has a June fiscal year-end. On June 30, 2006, analysts e

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. (Round your answer to one decimal place.)
Answer

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%

(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.) (Round your answer to two decimal places.)
$Answer

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Explanation / Answer

Part A

Cost of equity (CAPM) = Rf + (b* Rmp) = 5.7% +(0.7*5%) = 9.20%

Part B

Intrinsic value = DPS/ cost of equity = 1.33/9.2% = 14.46

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