Question

9) ​Colgate-Palmolive Company has just paid an annual dividend of $1.45. 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 6.9% per​ year, and its dividend payout rate will remain constant. If​ Colgate's equity cost of capital is 8.8% per​ year, what price does the​ dividend-discount model predict Colgate stock should sell for​ today?

The price per share is $? (Round to the nearest cent)

Answer 1

Year	Dividend
1	(1.45+0.16)=1.61
2	(1.61+0.16)=1.77
3	(1.77+0.16)=1.93
4	(1.93+0.16)=2.09
5	(2.09+0.16)=2.25

Value after year 5=(D5*Growth Rate)/(Equity Cost of Capital-Growth Rate)

=(2.25*1.069)/(0.088-0.069)

=$126.5921053

Hence current price=Future dividends and value*Present value of discounting factor(rate%,time period)

=1.61/1.088+1.77/1.088^2+1.93/1.088^3+2.09/1.088^4+2.25/1.088^5+126.5921053/1.088^5

which is equal to

=$90.48(Approx).