Pharmecology is about to pay a dividend of $1.90 per share. It’s a mature company, but future EPS and dividends are expected to grow with inflation, which is forecasted at 3.00% per year. The nominal cost of capital is 9.75%. 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.) Solution a. b) .

1. Pharmecology is about to pay a dividend of $1.90 per share. It’s a mature company, but
future EPS and dividends are expected to grow with inflation, which is forecasted at 3.00% per
year. The nominal cost of capital is 9.75%.
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 $1.90 per share. It’s a mature company, but
future EPS and dividends are expected to grow with inflation, which is forecasted at 3.00% per
year. The nominal cost of capital is 9.75%.
Solution
a.
b)
D0 = 1.9
Growth rate (g) = 3%
Nominal Cost of Capital (ke) = 9.75%
Current Stock Price = D0(1+g)/(ke-g)
(Using dividend discount model) = 1.9(1+3%)/(9.75%-3%)
= 1.9(1+3%)/(9.75%-3%)
= $28.99
Thus, Current stock price is $ 28.99