Question

​Colgate-Palmolive Company has just paid an annual dividend of $1.07. Analysts are predicting an 11.5% per year growth rate in earnings over the next five years. After​ that, Colgate's earnings are expected to grow at the current industry average of 5.6% per year. If​ Colgate's equity cost of capital is 8.9% per year and its dividend payout ratio remains​ constant, for what price does the DDM predict Colgate stock should​ sell?

Answer 1

Year	Growth rate	Dividend computation	Dividend	PV factor @8.9%, 1/(1+r)^time	Dividend * PV factor
1	11.50%	1.07*(1+10%)	$      1.19	0.9183	$           1.10
2	11.50%	1.19*(1+11.5%)	$      1.33	0.8432	$           1.12
3	11.50%	1.33*(1+11.5%)	$      1.48	0.7743	$           1.15
4	11.50%	1.48*(1+11.5%)	$      1.65	0.7110	$           1.18
5	11.50%	1.65*(1+11.5%)	$      1.84	0.6529	$           1.20
5			$   59.01	0.6529	$         38.53
				Current share price	$         44.27
Current Dividend	$            1.84
Rate of return	8.90%
Growth Rate	5.60%
Share Price at the horizon i.e. T5	=Current Dividend*(1+Growth rate)/(Rate of return-Growth Rate)
Share Price at the horizon i.e. T5	=1.84398810236566*(1+0.056)/(0.089-0.056)
Share Price at the horizon i.e. T5	$          59.01
Current share price	$          44.27	From above table