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=

YearDividendDiscount factorPresent value      

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

1$       1.620.921659$       1.49      

2$       1.740.849455$       1.48      

3$       1.860.782908$       1.46      

4$       1.980.721574  $       1.43      

5$       2.100.665045$       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

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