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const2013 [10]
3 years ago
15

Pharmecology just paid an annual dividend of $2.00 per share. It’s a mature company, but future EPS and dividends are expected t

o grow with inflation, which is forecasted at 3.50% per year. The nominal cost of capital is 10.25%.
a. What is Pharmecology’s current stock price? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Current Sock 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:
Business
1 answer:
lesantik [10]3 years ago
7 0

Answer:

a. Current Stock Price is $ 30.67

b. Current Stock price using forecasted real dividend and a real discount rate is $ 69.00

Explanation:

a. The question belongs to dividend discount model. It is used to calculate intrinsic price of the stock. This model assumes that price of stock or share is equal to net present value of its future dividends.

Price of Stock =  (Current year Dividend x ( 1+ growth rate)) / (nominal cost of capital - growth rate)

Current year Dividend = $ 2

Nominal Cost of Capital = 10.25 % or .1025

Growth rate = 3.50 % or 0.0350

Price of Stock = ( $2 x (1 + 0.035) / (.1025 - .035))

Price of Stock =  $ 2.07 / ( .1025 - 0.0350) = $ 30.67  

b. Price of Stock = Current year Dividend + (Dividend x( 1+ growth rate)) / (real cost of capital - growth rate)

Real Cost of Capital = [ (1 + nominal cost of Capital) / ( 1 + inflation rate)-1 ]

Inflation rate = 3.50 % or .0350

Real Cost of Capital  = [ ( 1 + .1025) / ( 1 + .0350) - 1 ] = 0.0652 or 6.50 %

Price of Stock =(Dividend x ( 1 + growth rate)) / ( Real cost of Capital - Inflation rate)

Price of Stock = ($ 2 x ( 1 + 0.0350)) / (0.0650 - 0.0350)  

Price of Stock = $ 69          

   

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Entertainment Tonight, Inc. manufactures and sells stereo systems that include an assurance-type warranty for the first 90 days.
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3 years ago
Turner, Roth, and Lowe are partners who share income and loss in a 1:4:5 ratio (in percents: Turner, 10%; Roth, 40%; and Lowe, 5
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Answer:

Turner, Roth, and Lowe

a. Loss from selling the assets = $78,800

b. Loss allocation to the partners:

                                                            Turner      Roth      Lowe

Loss sharing ($78,800)                      $7,880    $31,520   $39,400

c. Capital contribution to cover deficiency:

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Contribution to cover deficiency     $3,000    $12,000    $15,000

Explanation:

a) Data and Calculations:

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Income and loss sharing ratio:               1                4             5

Assets before liquidation = $130,800

Liabilities = $82,000  

Capital balances                                 $2,900   $14,200   $31,700

Cash received from sale of assets = $52,000 ($82,000 - $30,000)

Loss from sale of assets = $78,800 ($130,800 - $52,000)

Loss sharing ($78,800)                      $7,880    $31,520   $39,400

Contribution to cover deficiency       $3,000      $12,000   $15,000

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