Question
Q2) Sinclair Pharmaceuticals, a small drug company, will experience extremely high growth over the next few years and will reinvest all of its earnings in
Q2) Sinclair Pharmaceuticals, a small drug company, will experience extremely high growth over the next few years and will reinvest all of its earnings in expanding the company over this time. Earnings of $2 per share were just reported and are expected to grow by 30% per year for the next three years. After three years of high growth, it is expected that Sinclair will payout 50% of earnings as dividends for the following 2 years. During these two years, the company will have the same return on new investment. After this time, growth will drop to 5% and is expected to remain at 5% forever. Five years from now Sinclair will pay dividends that are 80% of its earnings. Sinclairs cost of capital is 10%. Show all work without the use of Excel.
- What is the return on new investment over the next 3 years for Sinclair pharmaceuticals? (5 points)
- What should the share price of Sinclair be in 5 years, immediately after paying its dividend? (5 points)
- What is Sinclairs share price today? (5 points)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started