Question

Pharm ecology is about to pay a dividend of $1.35 per share. It's a mature company, but future EPS and dividends are expected to grow with inflation, which is forecasted at 2.75% per year.

a. What is Pharm ecology's current stock price? The nominal cost of capital is 9.5%.
b. Redo part (a) using forecasted real dividends and a real discount rate.

Answer 1

To calculate the current stock price of Pharm ecology, we need to use the Gordon Growth Model. The current stock price of Pharm ecology is $20.00 per share.

Step-by-step explanation:

To calculate the current stock price of Pharm ecology, we need to use the Gordon Growth Model. The formula for the stock price is P = D / (r - g), where P is the stock price, D is the dividend per share, r is the required rate of return, and g is the growth rate of dividends.

Given that Pharm ecology is expected to grow its dividends with inflation at 2.75% per year, and the nominal cost of capital is 9.5%, we can calculate the stock price as follows:

1. Dividend per share = $1.35
2. Growth rate of dividends (g) = 2.75%
3. Required rate of return (r) = 9.5%
4. Stock price (P) = D / (r - g)
5. Stock price (P) = $1.35 / (0.095 - 0.0275)
6. Stock price (P) = $1.35 / 0.0675
7. Stock price (P) = $20.00 per share

The current stock price of Pharm ecology is $20.00 per share.

Keywords: Pharm ecology, current stock price, dividend, inflation, required rate of return, growth rate of dividends