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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You work for a pharmaceutical company that has developed a new vaccine. The patent on the vaccine will last 15 years. You expect that the drug's profits will be $2 million in its first year and that the profit will grow at a rate of 5% per year for the next 15 years. Once the patent expires, other pharmaceutical companies will be able to produce the same drug and competition will likely reduce growth to 1% per year. a. What is the present value of the new drug if the cost of capital is 8%? b. What is the drug's present value if competition causes the company to have negative growth of -5% (i.e., minus 5%) after the first 15 years?
You work for a pharmaceutical company that has developed a new drug. The patent on the drug will last 18 years. You expect that the drug's profits will be $2.4 million in its first year and that this amount will grow at a rate of 6% per year for the next 18 years. Once the patent expires, other pharmaceutical companies will be able to produce the same drug and competition will likely drive profits to zero. What is the present value of the new drug if the interest rate is 9% per year? The present value of the new drug is $ (Round to the nearest dollar.)
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…
You work for a pharmaceutical company that has developed a new drug. The patent on the drug will last 17 years. You expect that the drug's profits will be $1 million in its first year and that this amount will grow at a rate of 2% per year for the next 17 years. Once the patent expires, other pharmaceutical companies will be able to produce the same drug and competition will likely drive profits to zero, What is the present value of the new drug if the interest rate is 8% per year? The present value of the new drug is 5 million (Round to three decimal places.)
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You work for a pharmaceutical company that has developed a new drug. The patent on the drug will last 17 years. You expect that the drug's profits will be $2 million in its first year and that this amount will grow at a rate of 5% per year for the next 17 years. Once the patent expires, other pharmaceutical companies will be able to produce the same drug and competition will likely drive profits to zero. What is the present value of the new drug if the interest rate is 10% per year? The present value of the new drug is $______ million.
Pou are CEO of Rivet Networks, maker of ultra-high performance network cards for gaming computers, and you are considering whether to launch a new product. The product, the Killer X3000, will cost $907,000 to develop up front (year 0), and you expect revenues the first year of $798,000, growing to $1.58 million the second year, and then declining by 45% per year for the next 3 years before the product is fully obsolete. In vears 1 through 5, you will have fixed costs associated with the product of $105,000 per year, and variable costs equal to 55% of revenues. a. What are the cash flows for the project in years 0 through 5? D. Plot the NPV profile for this investment using discount rates from 0% to 40% in 10% increments. c. What is the project's NPV if the project's cost of capital is 10.7%? d. Use the NPV profile to estimate the cost of capital at which the project would become unprofitable; that is, estimate the project's IRR. a. What are the cash flows for the project in years 0…
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You are CEO of Rivet Networks, maker of ultra-high performance network cards for gaming computers, and you are considering whether to launch a new product. The product, the Killer X3000, will cost $897,000 to develop up front (year 0), and you expect revenues the first year of $807,000, growing to $1.41 million the second year, and then declining by 40% per year for the next 3 years before the product is fully obsolete. In years 1 through 5, you will have fixed costs associated with the product of $96,000 per year, and variable costs equal to 55% of revenues. a. What are the cash flows for the project in years 0 through 5? b. Plot the NPV profile for this investment using discount rates from 0% to 40% in 10% increments. c. What is the project's NPV if the project's cost of capital is 9.9%? d. Use the NPV profile to estimate the cost of capital at which the project would become unprofitable; that is, estimate the project's IRR. a. What are the cash flows for the project in years 0…

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