Colgate-Palmolive Company has just paid an annual dividend of $ 1.50$1.50. Analysts are predicting dividends to grow by $ 0.12$0.12 per year over the next five years. After then, Colgate's earnings are expected to grow 6.0 %6.0% per year, and its dividend payout rate will remain constant. If Colgate's equity cost of capital is 8.5 %8.5% per year, what price does the dividend-discount model predict Colgate stock should sell for today?

The price does the dividend-discount model predict Colgate stock should sell for today is $66.47

Explanation:

In order to calculate the price does the dividend-discount model predict Colgate stock should sell for today we would have to calculate first the Present value of dividend of next 5 years as follows:

Present value of dividend of next 5 years as follows=

Year Dividend Discount factor Present value

a b c=1.085^-a d=b*c

1 $ 1.62 0.921659 $ 1.49

2 $ 1.74 0.849455 $ 1.48

3 $ 1.86 0.782908 $ 1.46

4 $ 1.98 0.721574 $ 1.43

5 $ 2.10 0.665045 $ 1.40

Total $ 7.25

Then, we have to calculate the Present value of dividend after 5 years as follows:

Present value of dividend after 5 years=D5 * (1+g) / (Ke-g) * DF5

Present value of dividend after 5 years=$2.10 (1+6%) / (8.50%-6%) * 0.665045

Present value of dividend after 5 years=$59.22

Current value of stock=Present value of dividend of next 5 years + Present value of dividend after 5 years

Current value of stock = $7.25+$59.22

Current value of stock=$66.47

The price does the dividend-discount model predict Colgate stock should sell for today is $66.47