In mid-2015, Coca-Cola Company (KO) had a share price of $ 43.76, and had paid a...
In mid-2015, Coca-Cola Company (KO) had a share price of $ 43.76, and had paid a dividend of $ 1.04 for the prior year. Suppose you expect Coca-Cola to raise this dividend by approximately 6.8 % per year in perpetuity. a. If Coca-Cola's equity cost of capital is 8.1 %, what share price would you expect based on your estimate of the dividend growth rate? b. Given Coca-Cola's share price, what would you conclude about your assessment of Coca-Cola's future dividend growth?
Homework Answers
a.Price of share based on dividend growth rate = 1.04(1+0.068)/(0.081-0.068)
= $85.44
b.Since the share price of $43.76 is much lower than the fair price as per dividend growth model, It means that the market is assessing lower dividends in future by Coca-Cola
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