In mid-2012 Coca-Cola Company (KO) had a share price of $39. Its dividend was $1.00 per year and

QUESTION

In mid-2012, Coca-Cola Company (KO) had a share price of $39. Its dividend was $1.00 per year, and you expect Coca-Cola to raise this dividend by approximately 7% per year in perpetuity. a. If Coca-Colas equity cost of capital is 8%, what share price would you expect based on your estimate of the dividend growth rate? b. Given Coca-Colas share price, what would you conclude about your assessment of Coca- Colas future dividend growth?
Answer A Price = Dividend/Rate of return less growth Price = $ 1/8% less 7% Price = $ 100 Answer B Based on the market price, our growth forecast is probably too high. Growth rate

ent with market price is growth rate = Rate of return less div yield = 8% $ 1/ 39 = 5.44 %, which is more reasonable.

ANSWER:

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