Colgate-Palmolive Company has just paid an annual dividend of $ 1.97 Analysts are predicting dividends to...

Colgate-Palmolive Company has just paid an annual dividend of $ 1.97 Analysts are predicting dividends to grow by $ 0.15 per year over the next five years. After then, Colgate's earnings are expected to grow 6.2% per year, and its dividend payout rate will remain constant. If Colgate's equity cost of capital is 8.5 %per year, what price does the dividend-discount model predict Colgate stock should sell for today?

The price per share is $( ) (Round to four decimal places.)

Expert Solution

The price per share is $ 92.97

Working:

As per dividend discount method, current stock price is the present value of dividends.

Step-1:Present value of next 5 year's dividend

	Year	Dividend	Present value of 1	Present value of dividend
	a	b	c=1.085^-a	d=b*c
	1	$ 2.12	0.9217	$ 1.95
	2	$ 2.27	0.8495	$ 1.93
	3	$ 2.42	0.7829	$ 1.89
	4	$ 2.57	0.7216	$ 1.85
	5	$ 2.72	0.6650	$ 1.81


	Total			$ 9.44

	Working:
	Dividend of:
	Year
	1		=	$ 1.97	+	$ 0.15	=	$ 2.12
	2		=	$ 2.12	+	$ 0.15	=	$ 2.27
	3		=	$ 2.27	+	$ 0.15	=	$ 2.42
	4		=	$ 2.42	+	$ 0.15	=	$ 2.57
	5		=	$ 2.57	+	$ 0.15	=	$ 2.72


Step-2:Terminal value of dividend at the end of year 5

	Terminal Value		=	D5*(1+g)/(Ke-g)		Where,
			=	2.72*(1+0.062)/(0.085-0.062)		D5	Year 5 dividend		$ 2.72
			=	$ 125.59		g	Growth rate		6.2%
						Ke	Required Return		8.5%

Step-3:Present value of terminal value

	Present value		=	Terminal value at the end of Year 5*Present value of 1
			=	$ 125.59	*	0.6650
			=	$ 83.53
	Working:

	Present value of 1		=	(1+i)^-n		Where,
			=	(1+0.085)^-5		i	8.5%
			=	0.6650		n	5


Step-4:Present value of all dividends

	Present value of all dividends			=	$ 9.44	+	$ 83.53
				=	$ 92.97

	Thus,
		Current selling price of stock is			$ 92.97

jeff jeffy answered 2 years ago

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