Stock price

Shatin Intl. has 10 million shares, an equity cost of capital 13% and is expected to pay a total dividend of $20 million each year forever. It announces that it will increase its payout to shareholders. Instead of increasing its dividend, it will keep it constant and will start repurchasing $10 million of stock each year as well.

How much will its stock price increase?

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 that, 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 DDM predict Colgate stock should sell?

Solution:

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