Problem
HTBM Enterprises, a specialty pharmaceutical manufacturer, has been losing market share for three years since several key patents have expired. The dividend in 2021 was $10 million. This figure is expected to decline rapidly as more competitive generic drugs enter the market. Projected dividends for the next five years are $8.5 million, $7.0 million, $5 million, $2.0 million, and $.5 million. Dividends after the fifth year is expected to be negligible. The firm's board has decided to sell the firm to a larger pharmaceutical company interested in using HTBM's product offering to fill gaps in its own product offering until it can develop similar drugs. HTBM's cost of capital is 15%. Required:
1. What purchase price must HTBM obtain to earn its cost of capital?
2. What are the key challenges of the discounted cash flow (DCF) model in valuing the firms?
3. Provide two alternatives of firm valuation in addition to DCF.