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ā€‹Colgate-Palmolive Company has just paid an annual dividend of $ 1.09. Analysts are predicting dividends to grow by $ 0.19 per year over the next five years. Afterā€‹ then, Colgate's earnings are expected to grow 5.3 % perā€‹ year, and its dividend payout rate will remain constant. Ifā€‹ Colgate's equity cost of capital is 7.5 % perā€‹ year, what price does theā€‹ dividend-discount model predict Colgate stock should sell forā€‹ today?

Respuesta :

jepessoa

Answer:

$74.62

Explanation:

Divā‚€ = $1.09

expected growth $0.19 per year

Divā‚ = $1.28

Divā‚‚ = $1.47

Divā‚ƒ = $1.66

Divā‚„ = $1.85

Divā‚… = $2.04

then constant growth rte of 5.3%

equity cost = 7.5%

first we need to determine the stock price in year 5 using the Gordon growth model:

stock price = [dividend x (1+g)] / (Re - g) = ($2.04 x 1.053) / (7.5% - 5.3%) = $97.64

now we can discount all the future cash flows:

stock price = $1.28/1.075 + $1.47/1.075Ā² + $1.66/1.075Ā³ + $1.85/1.075ā“ + $2.04/1.075āµ + $97.64/1.075āµ = $1.19 + $1.27 + $1.34 + $1.39 + $1.42 + $68.01 = $74.62

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