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A New Drug: Two Growth Rates

CORPFN-G2AC1F

You are the CFO of PharmaceX, a pharmaceutica​l company that has launched a new drug to cure diabetes. The company has just announced that the new drug has generated earnings for \$2,000,000 in its first year.

Analysts predict that the earnings will grow at a rate of 6% per year for the next 15 years while the drug is covered under patent protection. After that, earnings will grow at a rate of 2%, and continue at this level forever. The interest rate is 8%.

What is the present value of the future earnings generated by the new drug?​

A

$49,633,660

B

$107,400,509

C

$51,604,363

D

$104,335,764