Question

In: Finance

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.)

Solutions

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

Related Solutions

Colgate-Palmolive Company has just paid an annual dividend of $ 1.81. Analysts are predicting dividends to...
Colgate-Palmolive Company has just paid an annual dividend of $ 1.81. Analysts are predicting dividends to grow by $ 0.18 per year over the next five years. After​ then, Colgate's earnings are expected to grow 6.7 % per​ year, and its dividend payout rate will remain constant. If​ Colgate's equity cost of capital is 8.1 % per​ year, what price does the​ dividend-discount model predict Colgate stock should sell for​ today? The price per share is ( ) ​$​ (Round...
Colgate-Palmolive Company has just paid an annual dividend of $1.99. Analysts are predicting dividends to grow...
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?
1.​Colgate-Palmolive Company has just paid an annual dividend of $ 1.13. Analysts are predicting dividends to...
1.​Colgate-Palmolive Company has just paid an annual dividend of $ 1.13. Analysts are predicting dividends to grow by $ 0.16 per year over the next five years. After​ then, Colgate's earnings are expected to grow 6.3 % per​ year, and its dividend payout rate will remain constant. If​ Colgate's equity cost of capital is 7.9 % per​ year, what price does the​ dividend-discount model predict Colgate stock should sell for​ today? The price per share is ​$ ( ) (Round...
​Colgate-Palmolive Company has just paid an annual dividend of $1.07. Analysts are predicting an 11.5% per...
​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?
A company has just paid an annual dividend of $0.99. Analysts are predicting a 10.6 %...
A company has just paid an annual dividend of $0.99. Analysts are predicting a 10.6 % per year growth rate in earnings over the next 5 years. After that, the company's earnings are expected to grow at the current industry's average of 5.6 % per year. If the firm's equity cost of capital is 8.2 %per year and its dividend payout ratio remains constant, what price does the dividend-discount model predict the company's stock should sell for?
Assume Highline Company has just paid an annual dividend of $1.04 . Analysts are predicting an...
Assume Highline Company has just paid an annual dividend of $1.04 . Analysts are predicting an 10.3% per year growth rate in earnings over the next five years. After​ then, Highline's earnings are expected to grow at the current industry average of 5.3% per year. If​ Highline's equity cost of capital is 9.4% per year and its dividend payout ratio remains​ constant, for what price does the​ dividend-discount model predict Highline stock should​ sell? The value of​ Highline's stock is...
Assume Highline Company has just paid an annual dividend of $ 0.98 . Analysts are predicting...
Assume Highline Company has just paid an annual dividend of $ 0.98 . Analysts are predicting an 11.9 % per year growth rate in earnings over the next five years. After​ then, Highline's earnings are expected to grow at the current industry average of 4.9 % per year. If​ Highline's equity cost of capital is 7.8 % per year and its dividend payout ratio remains​ constant, for what price does the​ dividend-discount model predict Highline stock should​ sell? The Value...
Assume Highline Company has just paid an annual dividend of $ 1.01. Analysts are predicting an...
Assume Highline Company has just paid an annual dividend of $ 1.01. Analysts are predicting an 10.1 % per year growth rate in earnings over the next five years. After​ then, Highline's earnings are expected to grow at the current industry average of 5.3 % per year. If​ Highline's equity cost of capital is 8.6 % per year and its dividend payout ratio remains​ constant, for what price does the​ dividend-discount model predict Highline stock should​ sell?
Assume Highline Company has just paid an annual dividend of $ 1.03. Analysts are predicting an...
Assume Highline Company has just paid an annual dividend of $ 1.03. Analysts are predicting an 10.4 % per year growth rate in earnings over the next five years. After​ then, Highline's earnings are expected to grow at the current industry average of 4.8 % per year. If​ Highline's equity cost of capital is 9.1 % per year and its dividend payout ratio remains​ constant, for what price does the​ dividend-discount model predict Highline stock should​ sell?
Assume Highline Company has just paid an annual dividend of $ 1.02 Analysts are predicting an...
Assume Highline Company has just paid an annual dividend of $ 1.02 Analysts are predicting an 10.9 % per year growth rate in earnings over the next five years. After?then, Highline's earnings are expected to grow at the current industry average of 5.1 % per year. If? Highline's equity cost of capital is 8.5 % per year and its dividend payout ratio remains? constant, for what price does the? dividend-discount model predict Highline stock should? sell?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT