Stocks 0/23 You have been hired by an investment bank and are helping plan an initial cffering for a firm called Pharma Inc. The firm has 100 million shares oustanding. These shares are currently owned by the founders. Pharma's management is projecting earnings of $ 200.00 million at the end of this year (t=1). They plan to plow back 75% of earnings and expect returns on new investment to grow by 4% per year forever. Pharma is fully equity financed and has no debt. Assume that Pharma's cost of capital is 6% Almost there a) Based on this information, what do you predict Pharma's stock price per share Need to find price got EPS will be if the company goes public at t=0 (today)? P/E SIS 2 2.00 /3 3 . 5% % /3 b) If the dividend growth is 3%, what is Pharma's return on investment for new projects? 5 Divdend grown on new projects 2 01/r-g Re-sequity cost of capital - ROI * Rentention rate 1.5 0.03 3.75*ROI=4 0.05333333 b) What return will an investor earn if she buys a share of the company at t=0 and sells it at t=1 (right after receiving the t=1 dividend), assuming all the firm's projections turn out to be correct? What is the investor's capital gain over this period? return $ capital gain $ $ 2 3 % 0.14 /4 /3 0 this may be true. After further analysis, the come up with a more realistic forecast under which 3 returns on new investment to grow by and then 8% per year until t=10 2% per year after that. They expect the plowback ratio to stay at 60% from t=10 on. Assuming investors agree with this revised growth forecast, what will the company's stock price per share be = if it goes public at t=0 under this scenario? 5 5 - /10