If CX s equity cost of capital is 12%, what is the current price of its stock? A

Question

If CX s equity cost of capital is 12%, what is the current price of its stock? Assume Colgate-Palmolive Company has just paid an annual dividend of $0.96. Analysts are predicting an 11% per year growth rate in earnings over the next five years. After then. Colgate's earnings are expected to grow at the current industry average of 5.2% per year. If Colgate's equity cost of capital is 8.5% per year and its dividend payout ratio remains constant, for what price does the dividend-discount model predict Colgate stock should sell?

Explanation / Answer

The required Price is $ 39.44.

Workings:

8.50%

Years Cash inflow Discount factor Present Value 1 1.07 0.922 0.982 2 1.18 0.849 1.005 3 1.31 0.783 1.028 4 1.46 0.722 1.052 5 1.62 0.665 1.076 5 Present Value of cash inflow of perpetuity 51.57 0.665 34.296 Total 39.44

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