Mana pharma produces an otc drug and earns its entire


Mana Pharma produces an OTC drug and earns its entire revenue from it. This OTC drug reduces lethargy and tiredness and has been a steady revenue earner for Mana Pharma. The product is not under any patent protection but has a strong brand and is able to generate stable growth and profit margins and this is expected to continue for the foreseeable future. Mana Pharma is 100% equity financed and is expected to earn $ 120 per share as profit in the coming year. Currently the firm earns a return on investment of 20% and has a retention ratio of 50% of earnings. The cost of equity of Mana Pharma is 15%. Mana Pharma is faced with a new investment opportunity which requires a one-time investment of $ 30 per share in year 1. This new project will generate a return of 5% on invested capital each year forever. The opportunity cost of this project is also 15%. Mana Pharma’s management will continue to invest in the older product as scheduled and the investment in the new project will be funded through a cut in dividend of $30. What is the value of Mana Pharma’s stock price today with this new project?

Request for Solution File

Ask an Expert for Answer!!
Financial Management: Mana pharma produces an otc drug and earns its entire
Reference No:- TGS02803683

Expected delivery within 24 Hours