Assume Colgate-Palmolive Company has just paid an annual divident of $1.01. Anal

Question

Assume Colgate-Palmolive Company has just paid an annual divident of $1.01. Analysts are predicting an 10.5% per year growth rate in earnings over the next 5 years. After that, Colgate's earnings are expected to grow at the current industry average of 5.5% per year. If Colgate's equity cost of capital is 8.7% per year and its dividend payout ratio remains constant, for what price does the dividend-discount model predict Colgate stock should sell? The value of Colgate's stock is $_________ (Round to the nearest cent)

Explanation / Answer

Value of Colgate's Stock Calculation Year Base Dividend Amount Present Value Factor @ 8.7% Present Value 1 Do*110.5% 1.116 0.920 1.03 2 D1*110.5% 1.233 0.846 1.04 3 D2*110.5% 1.363 0.779 1.06 4 D3*110.5% 1.506 0.716 1.08 5 D4*110.5% 1.664 0.659 1.10 5 D5*105.5% / (Ke-g) 54.857 0.659 36.15 [1.755 / (8.7%-5.5%)] Present Value of Stock 41.46

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