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Assume that new biotechnology companies have an average P-E ratio of 600, and will grow to companies comparable to S&P 500 companies in 10 years.

Assume that new biotechnology companies have an average P-E ratio of 600, and will grow to companies comparable to S&P 500 companies in 10 years. The companies in the S&P 500 have an average P-E ratio of 30. The discount rate (investors required rate of return), R = 0.10.

What is the market's forecast of return on equity for the new biotech companies? Is it a reasonable expectation?

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