Question

​Colgate-Palmolive Company has just paid an annual dividend of

$ 1.07.

Analysts are predicting an

10.6 %

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?

The value of​ Colgate's stock is

​$nothing.

​(Round to the nearest​ cent.)

Answer 1

D1=(1.07*1.106)=1.18342

D2=(1.18342*1.106)=1.30886252

D3=(1.30886252*1.106)=1.44760195

D4=(1.44760195*1.106)=1.60104776

D5=(1.60104776*1.106)=1.77075882

Value after year 5=(D5*Growth rate)/(Equity cost of capital-Growth rate)

=(1.77075882*1.056)/(0.089-0.056)

=56.6642822

Hence value of stock=Future dividend and value*Present value of discounting factor(rate%,time period)

=1.18342/1.089+1.30886252/1.089^2+1.44760195/1.089^3+1.60104776/1.089^4+1.77075882/1.089^5+56.6642822/1.089^5

=$42.60(Approx).