In mid-2015, 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-Cola’s equity cost of capital is 8%, what share price would you expect based on your estimate of the dividend growth rate?
b. Given Coca-Cola’s share price, what would you conclude about your assessment of Coca-Cola’s future dividend growth?
Please show all steps.