Colgate-Palmolive Company has just paid an annual dividend of . Analysts are predicting dividends to grow by per year over the n

Question

2 years ago

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Colgate-Palmolive Company has just paid an annual dividend of . Analysts are predicting dividends to grow by per year over the n

ext five years. Afterâ€‹ then, Colgate's earnings are expected to grow perâ€‹ year, and its dividend payout rate will remain constant. Ifâ€‹ Colgate's equity cost of capital is perâ€‹ year, what price does theâ€‹ dividend-discount model predict Colgate stock should sell forâ€‹ today?

Business

1 answer:

denis23 [38] · Answer 1 · 2023-04-19T22:00:58+03:00

The amount of $97.85 is the price that dividend-discount model predict that Colgate stock should sell for today

Given Information

Current dividend (D0) = $1.59

Dividend payments for next five years includes:

D1 = 1.59 +0.18

D1 = 1.77

D2 = 1.77 +0.18

D2 = 1.95

D3 = 1.95 +0.18

D3 = 2.13

D4 = 2.13 +0.18

D4 =2.31

D5 = 2.31 +0.18

D5 =2.49

Year Cash Flow PVF at 8.1% Present value

1 1.77 0.92506938 1.637372803

2 1.95 0.855753358 1.668719048

3 2.13 0.791631229 1.686174517

4 2.31 0.73231381 1.691644901

5 2.49 0.677441082 1.686828295

Present value of Dividends 8.3707

PV of remaining dividends in 5 year = D5 x (1+g)/(Ke-g))

PV of remaining dividends in 5 year = 2.49(1+0.061)/(0.081-0.061)

PV of remaining dividends in 5 year = $132.0945

Given that g=6.1%, ke=8.1%

PV of remaining dividends in year = 0 = PV of the remaining dividends in year 5* 1/(1+0.081)^5

= 132.0945 * 1/(1+0.081)^5

= $89.48624

As per dividend-discount model, Colgate stock should sell for today = PV of Dividends till 5th year + PV of Remaining Dividend at t=0

= $89.48624 + $8.3707

= $97.8531

= $97.85

Hence, the amount of $97.85 is the price that dividend-discount model predict that Colgate stock should sell for today.