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2 June, 21:00

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?

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  1. 2 June, 21:11
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    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
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