Question

Colgate-Palmolive Company has just paid an annual dividend of $ 1.88. Analysts are predicting dividends to grow by $ 0.12per year over the next five years. After then, Colgate's earnings are expected to grow 5.9 per year, and its dividend payout rate will remain constant. If Colgate's equity cost of capital is 7.6 % 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.)

Answer 1

Year 1 dividend = 1.88 + 0.12 = 2

Year 2 dividend = 2 + 0.12 = 2.12

Year 3 dividend = 2.12 + 0.12 = 2.24

Year 4 dividend = 2.24 + 0.12 = 2.36

Year 5 dividend = 2.36 + 0.12 = 2.48

Year 6 dividend = 2.48 * 1.059 = 2.62632

Value at year 5 = D6 / required rate - growth rate

Value at year 5 = 2.62632 / 0.076 - 0.059

Value at year 5 = 2.62632 / 0.017

Value at year 5 = $154.4894

Price per share = 2 / (1 + 0.076)¹ + 2.12 / (1 + 0.076)² + 2.24 / (1 + 0.076)³ + 2.36 / (1 + 0.076)⁴ + 2.48 / (1 + 0.076)⁵ + 154.4894 / (1 + 0.076)⁵

Price per share = $116.0798