Sinclair Pharmaceuticals, a small drug company, hasdeveloped a vaccine that will protect againstHelicobacter pylori, a bacterium that is the cause of anumber of diseases of the stomach. It is expected thatSinclair Pharmaceuticals will experience extremely highgrowth over the next three years & will reinvest all of itsearnings in expanding the company over this time.Earnings were $1.65 per share before the development ofthe vaccine (in year 0) & are expected to grow by 40%per year for the next three years. After this time, it isexpected that growth will drop to 6% & stay there for theexpected future. Four years from now Sinclair will beginpaying dividends that are equal to 75% of its earnings. Ifits equity cost of capital is 12%, what is the value of ashare of Sinclair Pharmaceuticals today?

1. **Earnings Growth Projection**: - The problem states that earnings per share (EPS) were $1.65…

Answered: Sinclair Pharmaceuticals, a small drug…

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

Section: Chapter Questions

Problem 1PS

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Following the outbreak of the Novel Coronavirus (COVID 19), CPC a pharmaceutical companyis considering introducing a new vaccine unto the market to help fight the virus. This will requirethe injection of huge capital to the tune of GH¢40,000,000 for the purchase of the equipment forproduction. It will cost CPC an additional GH¢ 5,500,000 to set up the production facility andinstall that equipment for production. Mr. Smart, the CEO of CPC believes that the vaccine couldbe manufactured in a building owned by the firm and located in East Legon. This vacant buildingand the land can be sold for GH¢ 1,500,000 after taxes. CPC will finance the production of the
BIG Pharmaceuticals Ltd. has invested $330,000 to date in developing a new typeof insect repellent. The repellent is now ready for production and sale, and theMarketing Manager estimates that the product will sell 170,000 bottles in the firstyear, 210,000 bottles in the second years and 260,000 bottles a year over the nextthree years. The selling price of the insect repellent will be $6.00 a bottle andvariable costs are estimated to be $3.00 a bottle. Second- and third-year price willbe $6.99 a bottle with a variable cost of $3.50 a bottle, Fourth- and fifth yearselling price will be $7.95 with a variable cost of $3.75. Fixed costs (excludingamortization) are expected to be $210,000 a year. The figure is made up of$165,000 additional fixed costs and $45,000 fixed costs relating to the existingbusiness that will be apportioned to the new business. These costs will increaseby 5% each year.To produce the repellent, machinery and equipment costing $650,000 will have tobe purchased…
BIG Pharmaceuticals Ltd. has invested $330,000 to date in developing a new typeof insect repellent. The repellent is now ready for production and sale, and theMarketing Manager estimates that the product will sell 170,000 bottles in the firstyear, 210,000 bottles in the second years and 260,000 bottles a year over the nextthree years. The selling price of the insect repellent will be $6.00 a bottle andvariable costs are estimated to be $3.00 a bottle. Second- and third-year price willbe $6.99 a bottle with a variable cost of $3.50 a bottle, Fourth- and fifth yearselling price will be $7.95 with a variable cost of $3.75. Fixed costs (excludingamortization) are expected to be $210,000 a year. The figure is made up of$165,000 additional fixed costs and $45,000 fixed costs relating to the existingbusiness that will be apportioned to the new business. These costs will increaseby 5% each year.To produce the repellent, machinery and equipment costing $650,000 will have tobe purchased…
Due to the ongoing COVID 19 Pandemic, Sterilic Ltd had decided to expand their sanitation product line to include the production of disposable face masks. The equipment will cost Sterilic $1,575,000 and it will cost $425,000 to install. Sterilic believes there will be a steady demand of masks at least for next five years and so it expects this project will generate after-tax cash flows of $654,500 per year for the 5 year life of the project, with the first cash flow starting at the end of first year. Sterilic will raise the fund for the new project by a mix of new debt and new equity that will maintain its target debt to equity ratio of 0.25. Sterilic wishes to raise the funds by: A new issue of ordinary shares. The floatation costs of the new share issue would be 10% of the amount raised. The beta for Sterilic is 1.75, the risk free rate is 2.5% and the market rate of return is 9.5%. A new issue of 5-year Bonds with yield to maturity of 6.25% pa. The floatation costs of the new…
RESEARCH AND DEVELOPMENT - Financial Reporting Alert Industries has spent $5 billion over the last three years in developing a new drug labeled COVEX 22. FDA approval is expected by the end of the month, at which time the drug will be available for sale. None of Alert's competitors has a product similar to COVEX 22, and the medical community is anxiously awaiting availability of this drug. Although COVEX 22 promises to be a "wonder drug" with huge financial success, Alert's income statements for the last few years have shown substantial losses and Alert's statement of financial position only includes $ 0.3 billion product COVEX 22 among the assets of the business. Explain why one of Alert's seemingly most valuable assets apparently has been reported for only $0.3 billion in the statement of financial position, and why Alert's income statements for the past few years reported substantial losses.
Judy has just completed the development of a better face shield for health workers. The new product isexpected to produce annual revenues of $150,000. Judy requires an investment in an advanced 3D Printercosting $9000.34 The project has an expected life of 5 years based upon the development and disseminationof a vaccine for coronavirus. The 3D printer will have $3000 salvage value as the market for 3D printers will beflooded as demand plummets for face shields. In order to produce the face shields Judy must maintain a largeinventory of plastic pellets. Therefore, working capital is expected to increase by $14,999.00 However, Judywill only recover $1278 of working capital at the end of the products life cycle. Annual operating expenses areestimated at $145,000. The required rate of return is 6%.• Calculate the Net Present Value• Prepare a schedule of projected annual cash flows
You are the financial manager of the firm LAB.inc which does research in the medical field, your company needs an estimate of a financing plan for a research project. The research project according to the evaluation of the experts will be spread over a period of 4 years. The annual funding required to conduct this research is $100,000 at the beginning of each year. The firm has set a term of 7 years to raise the necessary funds to finance this research, the nominal interest rate is 8% capitalized quarterly. 1. How much does the company need to save at the end of each month to fund this research in 7 years? 2. Draw the timeline for this financing plan by presenting all the relevant elements. If the firm wants to start financing the research project today t=0, by taking out a bank loan equal to the VA of all the financing needs of the research project (for the 4 years). 3. Calculate the amount of monthly payments that the firm must pay to repay this bank loan for a period of 5 years?
A state department of health is considering a public awareness campaign to encourage vaccination. It determines that the cost of this campaign would be $750,000 per year for the next 6 years. It estimates that the campaign would reduce rates of illness and communicable disease. At the end of the first year of the campaign, the resulting savings would be $1,040,000; the savings would decrease by $80,000 each of the following 5 years. Assuming a discounting factor of 8%, compute the benefit cost ratio. Carry all interim calculations to 5 decimal places and them round your final answer to two decimal places.
Merck and Johnson & Johnson Merck & Co., Inc. (USA) and Johnson & Johnson (USA)are two leading producers of healthcare products. Each has considerable assets and each expendsconsiderable funds each year toward the development of new products. The development of anew healthcare product is often very expensive and risky. New products frequently must undergoconsiderable testing before approval for distribution to the public. For example, it took Johnson& Johnson 4 years and $200 million to develop its 1-DAY ACUVUE contact lenses. Thefollowing are some basic data compiled from the financial statements of these two companies. Instructions(a) What kinds of intangible assets might a healthcare products company have? Does thecomposition of these intangibles matter to investors—that is, would it be perceived differently ifall of Merck’s intangibles were goodwill, than if all of its intangibles were patents?(b) Suppose the president of Merck has come to you for…
The Hershey Company is planning on releasing a new line of gluten-free candy products. New equipment needed to manufacture the candy will cost $4.1 million and will be depreciated by straight-line depreciation over 6 years. In addition, there will be $7 million spent on marketing and promotion of the new candy line in the first year only. It is expected that the new candy line will generate incremental revenue of $6.2 million per year for 6 years with associated production and support costs of $1.5 million per year. If Hershey's marginal tax rate is 21%, what is the incremental free cash flow in YEAR 2 of this project? O A. $-1.674 million B. $3.173 million C. $3.856 million O D. $4.574 million
Firm Z has invested $4 million in marketing campaign to assess the demand for the product Minish. This product will be in the market next year and will last five years. Revenues are projected to be $50 million per year along with expenses of $20 million. The firm spends $15 million immediately on equipment that will be depreciated using MACRS depreciation to zero. Additionally, it will use some fully depreciated existing equipment that has a market value of $4 million. Finally, Minish will have no incremental cash or inventory requirements (products will be shipped directly from the contract manufacturer to customers). But, receivables are expected to account for 15% of annual sales. Payables are expected to be 15% of the annual cost of goods sold (COGS) between year 1 and year 4. All accounts payables and receivables will be settled at the end of year 5. Based on this information and WACC in the first part of the question, find the NPV of the project. Identify the IRR of the…
Firm Z has invested $4 million in marketing campaign to assess the demand for the product Minish. This product will be in the market next year and will last five years. Revenues are projected to be $50 million per year along with expenses of $20 million. The firm spends $15 million immediately on equipment that will be depreciated using MACRS depreciation to zero. Additionally, it will use some fully depreciated existing equipment that has a market value of $4 million. Finally, Minish will have no incremental cash or inventory requirements (products will be shipped directly from the contract manufacturer to customers). But, receivables are expected to account for 15% of annual sales. Payables are expected to be 15% of the annual cost of goods sold (COGS) between year 1 and year 4. All accounts payables and receivables will be settled at the end of year 5. Based on this information and WACC of 5.418, find the NPV of the project. Identify the IRR of the project. Draw NPV vs r graph of…

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