Question
Your neighbor, who is the CEO of Virus-Buster Biotech (VBB), recently mentioned that his firm had perfected a therapeutic drug to minimize the impact of
Your neighbor, who is the CEO of Virus-Buster Biotech (VBB), recently mentioned that his firm had perfected a therapeutic drug to minimize the impact of COVID-19. VBB is planning on announcing its R&D success next week. At the conclusion of your conversation, you head inside to your home office to take a closer look at the information available on VBB. After checking the recent news stories on the Internet you realize that there is no publicly available information indicating the information you just obtained. With this in mind you estimate that the firm will experience extraordinary growth of 80% per year for two years, and another three years of unusual growth at 20% per year. After this five year period, you feel competition will cause the firms growth rate to fall to its previous growth pattern of 10% per year. What price are you willing to pay for this stock, given you have a required return of 13.7% and the firm just paid a dividend of $1 per share?
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