What is the intrinsic equity value per share for BBPC

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Question - For the year that just ended, BigBadPharmaCorp ("BBPC" for short) paid a dividend of $3 per share. BBPC owns the patent on a blockbuster drug, but that patent will expire soon. Analysts estimate that BBPC's dividends will grow at 16% per year for the next four years (for simplicity, assume that the first dividend will be paid exactly one year from today). At that time, the patent will expire, and from that point on BBPC's dividends are expected to grow at a rate of 1.4% per year forever. BBPC's annual cost of equity is 12%. Suppose that the yield curve is flat, and risk-free yields are 3% per year for all maturities.

a) What is the intrinsic equity value per share for BBPC?

b) Suppose that the stock is currently trading at $40 per share. Based on your answer in part a), would you recommend a BUY or SELL for this stock? Why?

Reference no: EM132814503

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