P9-13 (similar to) Question Help Colgate-Palmolive Company has just paid an annu

ID: 2782666 • Letter: P

Question

P9-13 (similar to)

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Colgate-Palmolive Company has just paid an annual dividend of

$1.08.

Analysts are predicting dividends to grow by

$0.13

per year over the next five years. After then, Colgate's earnings are expected to grow

5.7%

per year, and its dividend payout rate will remain constant. If Colgate's equity cost of capital is

8.3%

per year, what price does the dividend-discount model predict Colgate stock should sell for today?The price per share is

$nothing.

(Round to two decimal places.)

P9-13 (similar to)

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Value after year 5=(Dividend for year5*Growth rate)/(Cost of capital-Growth rate)

=(1.73*1.057)/(0.083-0.057)=$70.33115385

Hence current price=Future dividends*Present value of discounting factor(8.3%,time period)

=1.21/1.083+1.34/1.083^2+1.47/1.083^3+1.60/1.083^4+1.73/1.083^5+70.33115385/1.083^5

=$52.95(Approx)

Year D1 (1.08+0.13)=1.21 D2 (1.21+0.13)=1.34 D3 (1.34+0.13)=1.47 D4 (1.47+0.13)=1.60 D5 (1.60+0.13)=1.73

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