Sinclair Pharmaceuticals, a small drug company, develops a vaccine that will pro
ID: 2622052 • Letter: S
Question
Sinclair Pharmaceuticals, a small drug company, develops a vaccine that will protect against
Helicobacter pylori, a bacteria that is the cause of a number of diseases of 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 the development of the vaccine (i.e., EPS0) and are expected to grow
by 40% per year for the next three years. After this time, it is expected growth will drop to 5%
and stay there for the expected future. Four years from now Sinclair will pay dividends that are
75% of its earnings. If its equity cost of capital is 10%, what is the value of a share of Sinclair
Pharmaceuticals today?
Explanation / Answer
Hi,
Please find the answer as follows;
You need to calculate the present value of all future dividend and share price after 3 Years.
D1 = 1.20*(1+.40)
D1 = 1.20*(1+.40)^2
D3 = 1.20*(1+.40)^3
P3 = 1.20*75%*(1+.05)/(.10 - .05)
Current Value of Stock = 1.20*(1+.40)/(1+.10)^1 + 1.20*(1+.40)^2/(1+.10)^2 + 1.20*(1+.40)^3/(1+.10)^3 + 1.20*75%*(1+.05)/(.10 - .05)*(1+.10)^3 = $20.14
Answer is $20.14.
Thanks.