Question

Colgate-Palmolive Company has just paid an annual dividend of $1.06. Analysts are predicting an 10.7% 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 5.3% per year. If​ Colgate's equity cost of capital is 9.4% per year and its dividend payout ratio remains​ constant, for what price does the DDM predict Colgate stock should​ sell?

Answer 1

Value of stock = present value of next 5 years dividend + present value of terminal value at end of 5 years

Terminal value at end of 5 years = Year 5 dividend * (1 + growth rate after 5 years) / (cost of capital - growth rate after 5 years)

Present value = future value / (1 + cost of capital)^{number of years}

The value of stock today = $34.37