In: Finance
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.)
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 | |||||||||