If the equity discount rate is 10% per year, what is the value of a share of Sinclair Pharmaceuticals today?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Sinclair Pharmaceuticals, a small drug company, just completed development of
a vaccine that will protect against Helicobacter pylori, a bacteria that causes a number of
diseases in the stomach. It is expected that Sinclair Pharmaceuticals will experience
extremely high growth over the next three years and will reinvest all of its earnings in
expanding the company over this time. Earnings were $1.20 per share before completion
of the development of the vaccine and are expected to grow by 40% per year for the next
three years. After this time, its expected growth will drop to 5% and stay there for the
foreseeable future. Four years from now Sinclair will pay dividends that are 75% of its
earnings from there on forever.
Question: If the equity discount rate is 10% per year, what is the value of a share of
Sinclair Pharmaceuticals today?
 
 
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