Question 2

This question is based on Colgate-Palmolive Company (CL). CL is a multinational consumer products company that produces and distributes household, health care, personal care and veterinary products.

CLs annual report and financial statements for the year ended 31 December 2021 are provided for you on Canvas under Assignment 3.

Required:

Compute CLs net operating assets (NOA) and net nonoperating obligations (NNO) for year-end 2021. Treat Other current assets, Other assets, Other accruals, and Other liabilities as operating items.

(3 marks)

Compute CLs comprehensive net operating profit after tax (NOPAT) for 2021, assuming a federal and state statutory tax rate of 22%. Treat Other (income) expense, net and Non-service related postretirement costs from the Consolidated Statements of Income and Retirement plan and other retiree benefit adjustments from the Consolidated Statements of Comprehensive Income as operating.

(2 marks)

Forecast CLs sales, comprehensive NOPAT, and NOA for the years 2022 through 2025 using the following assumptions:

Sales growth for the years 2022-2024	5.5
Sales growth for the year 2025	1.5
Comprehensive NOPAT margin (NOPM) for the years 2022-2025	15%
NOA turnover (NOAT) using year-end balance for the years 2022-2025	2.3
Forecast the terminal period value assuming a 1.5% terminal period growth and using the above NOPM and NOAT assumptions.

(4 marks)

Estimate CLs equity value per share as at 31 December 2021 using the discounted cash flow (DCF) model, assuming a discount rate (WACC) of 5.3%. Note that the number of common shares outstanding at the end of 2021 is 840.5 million. You also need to consider noncontrolling interest (NCI), similar to NNO, in obtaining the equity estimate. Assume the intrinsic value of NCI equals its book value.

(10 marks)

Apply a mid-year adjustment to the estimated stock value in part (d).

(1 mark)

CLs stock closed at $85.34 on 31 December 2021. How does your valuation estimate in part (e) compare with this closing price? What do you believe are some reasons for the difference? What investment decision is suggested from your results?

(3 marks)

Question 2 (Continued)

What would the terminal growth rate have to be to warrant the actual stock price on 31 December 2021, keeping all else unchanged? Show your workings. [Hint: you need to consider the mid-year adjustment factor in the reverse engineering calcultion].

(3 marks)