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
