Sinclair Pharmaceuticals, a small drug
company, develops a vaccine that will cure the
common cold. 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
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?
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