Problem:
The Ectoplasto Drug Company's common stock is considered highly speculative. Security analysts believe that over the next year four possible outcomes are possible for the company's research program. There is a 60% chance that their new drug will be successful, in which case the stock will be worth $240 per share. There is a 5% chance that the drug will be a complete failure, in which case the stock will be worthless. There are two mid-range outcomes: a 15% chance of a good but not spectacular drug, and a 20% chance of an average selling drug. With a good drug the stock will be worth $180 per share, while an average drug will produce a stock price of $75 per share. If the appropriate discount rate is 25%, how much should you be willing to pay for the stock today?