Sinclair Pharmaceuticals,a Small Drug Company,develops a Vaccine That Will Protect

question 29

Multiple Choice

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 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?

• A)$33.33
• B)$38.96
• C)$48.30
• D)$52.00

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Definitions:

Preferred Stock

Preferred stock is a class of shares that offers dividends and ownership in a company but typically does not confer voting rights, with dividends received before common shareholders.

Par Value

The nominal or face value of a bond, share of stock, or coupon as indicated on a certificate or instrument.

Net Income

The total profit or loss of a company after all revenues, costs, and expenses have been deducted, often referred to as the bottom line.

Earnings Per Share

A financial metric that shows the portion of a company's profit allocated to each outstanding share of common stock.