Pharmecology just paid an annual dividend of $2.30 per share. It’s a mature comp

Question

Pharmecology just paid an annual dividend of $2.30 per share. It’s a mature company, but future EPS and dividends are expected to grow with inflation, which is forecasted at 5.00% per year. The nominal cost of capital is 11.75%.

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

Current stock price            $

b. 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.)

Current stock price            $

Explanation / Answer

a. pharmecolgy current stock price :

ACCORDING TO THE DDM MODEL

PO= D1/ Re- G

p0 = D1/ RE - G

2.30 (1.05)/(0.1175 -0.05)

= 2.415/0.0675

= $35.78

B. THE REAL DISCOUNT RATE IS :

(1 + NOMINAL) = ( 1+ REAL)(1+INFLATION)

1.1175 = (1 +REAL)(1.05)

REAL DISCOUNT RATE = 6.43%

SO, SHARE PRICE WITH REAL RATES WHEN G= O IS

2.30/ 0.0643= $5.77

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