Pharmecology is about to pay a dividend of $2.35 per share. It’s a mature compan

Question

Pharmecology is about to pay a dividend of $2.35 per share. It’s a mature company, but future EPS and dividends are expected to grow with inflation, which is forecasted at 5.25% per year. The nominal cost of capital is 12.00%.

What is Pharmecology’s current stock price? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

What would be Pharmecology’s current stock price using forecasted real dividends and a real discount rate? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Pharmecology is about to pay a dividend of $2.35 per share. It’s a mature company, but future EPS and dividends are expected to grow with inflation, which is forecasted at 5.25% per year. The nominal cost of capital is 12.00%.

Explanation / Answer

Answer:a Calculation of the Pharmecology’s current stock price:

P0=D1/Ke-g

=$2.35(1+0.0525)/(0.12-0.0525)

=$2.473375/0.0675

=$36.64

Answer:b Current stock price= ((1+ nominal rate) / (1+ growth)) – 1

= (1.12/1.0525) – 1 = .0641330

=Dividend + (Dividend / rate you just calculated above) = 2.35+(2.35/.0641330) = $38.99

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