Question

Colgate-Palmolive Company has just paid an annual dividend of $ 1.72 . 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 5.1 % per​ year, and its dividend payout rate will remain constant. If​ Colgate's equity cost of capital is 8.6 % per​ year, what price does the​ dividend-discount model predict Colgate stock should sell for​ today? The price per share is ?

Answer 1

HI

Below is the formula and values using excel to find out price using dividend discount model

B2 - X Fac Current Dividend DO A B Current Dividend DO growth for first 5 years Year 1 dividend PV of year 1 dividend year 2 Dividend PV of Year 2 Dividend Year 3 dividend PV of year 3 dividend Year 4 dividend PV of year 4 dividend Year 5 dividend PV of year 5 dividend Equity Cost of Capital Perpetual Dividend growth rate 1.72 0.13 =C2 C3 =C4/(1+C14)^1 =C4+C3 =C6/(1+C14)^2 =C6+C3 =C8/(1+C14)^3 =C8+C3 =C10/(1+C14)^4 =C10+C3 =C12/(1+C14)^5 0.086 0.051 Price to be sold using dividend discount model =C5+C7+C9+C11+C13+C12"(1+C15)/((C14-C15)*(1+C14)^5)

Current Dividend D0	$1.72
growth for first 5 years	$0.13
Year 1 dividend	$1.85
PV of year 1 dividend	1.70
year 2 Dividend	$1.98
PV of Year 2 Dividend	1.68
Year 3 dividend	$2.11
PV of year 3 dividend	1.65
Year 4 dividend	$2.24
PV of year 4 dividend	1.61
Year 5 dividend	$2.37
PV of year 5 dividend	1.57
Equity Cost of Capital	8.60%
Perpetual Dividend growth rate	5.10%
Price to be sold using dividend discount model	55.32

Hence selling amount should be $55.32 per share

Thanks