Question

Colgate-Palmolive Company has just paid an annual dividend of

$1.99.

Analysts are predicting dividends to grow by

$0.19

per year over the next five years. After? then, Colgate's earnings are expected to grow

6.9%

per? year, and its dividend payout rate will remain constant. If? Colgate's equity cost of capital is

7.4%

per? year, what price does the? dividend-discount model predict Colgate stock should sell for? today?

Answer 1

As per dividend discount model, Current Price of Stock is the present value of dividends.
a.	Present Value of 5 years dividend:
	Year	Dividend	Discount factor	Present Value
	1	$           2.18	0.931099	$       2.03
	2	$           2.37	0.866945	$       2.05
	3	$           2.56	0.807211	$       2.07
	4	$           2.75	0.751593	$       2.07
	5	$           2.94	0.699808	$       2.06
		Total		$    10.28
b.	Calculation of terminal value of dividend:
	Terminal Value		=	D5*(1+g)/(Ke-g)			Where,
			=	2.94*(1+0.069)/(0.074-0.069)			D5	Year 5 dividend		$       2.94
			=	$ 628.57			Ke	Required Return		7.4%
							g	Growth in dividend		6.9%
c.	Present value of terminal value			=	$ 628.57	x	0.699808
				=	$ 439.88
d.	Present value of all dividends			=	$    10.28	+	$ 439.88
				=	$ 450.15
Thus, Current price of stock is			$ 450.15