Colgate-Palmolive Company has just paid an annual dividend of $0.85. Analysts are predicting a 10% per year growth rate in earnings over the next five years. After that, Colgate’s earnings are expected to grow at the current industry average of 4.7% per year. If Colgate’s equity cost of capital is 7% per year and its dividend payout ratio remains constant, for what price does the dividend-discount model predict Colgate stock should sell?

Question

Colgate-Palmolive Company has just paid an annual dividend of $0.85.  Analysts are predicting a 10% per year growth rate in earnings over the next five years.  After that, Colgate’s earnings are expected to grow at the current industry average of 4.7% per year.  If Colgate’s equity cost of capital is 7% per year and its dividend payout ratio remains constant, for what price does the dividend-discount model predict Colgate stock should sell?