Virusator is a bio-medical start-up specializing in producingvaccines and treatments to battle dangerous viruses. To...

Virusator is a bio-medical start-up specializing in producing vaccines and treatments to battle dangerous viruses. To finance its activities it recently took a one year loan of two million dollars, at an annual effective rate of 10%. It must repay the loan in September 2021 (a year from now). Earnings this coming year are expected to be $3.3 million. Assume earning are received in September 2021 (i.e, one year from now). To finance growth it plans on reinvesting 90% of the earnings left after repaying the loan. The remainder will be paid as a dividend to shareholders. Virusator’s earnings will grow at a rate of 50% per year, starting from September 2021, for a duration of 3 years. Then it will enter a more mature growth phase and grow at a constant rate of 5% per annum forever after. Virusator will keep the payout policy unchanged for the first 3 years. Afterwards it will payout 70% of earnings as dividends to shareholders. Virusator’s cost of equity capital is 20%.

4.a Value Virusator.

Expert Solution

statement showing expected dividends
	Sept 2021	Sept 2022	Sept 2023	Sept 2024	Sept 2025
Expected earnings($Million)	3.3	4.95	7.425	11.1375	11.694375	(50% growth for 3 years starting from sept 2021 & there after 5% growth)
Growth in Earnings		50%	50%	50%	5%

Less-Interest payment($2 million*10%)	0.2	0	0	0	0
Less-Loan principal payment	2	0	0	0	0

Earnings available	1.1	4.95	7.425	11.1375	11.694375
Pay out ratio	10%	10%	10%	10%	70%	[pay out ratio = 100- retention ration]

Expected dividend [ earnings available* Payout ratio]	0.11	0.495	0.7425	1.11375	8.1860625

Ve = value of the equity

d1= next expected dividend

Ke= cost of equity capital

g= growth rate

Hence value of equity at the end sept 2024 = [ dividend of sept 2025/ (20%-5%)]

=> value of equity at the end sept 2024 = 8.1860625/0.15 = $54.57375 Million

value of the virusator today = Present value of the Dividends upto sept 2024+ PV of value of equity at the end sept 2024

sl no		nature	Amount($ million)	PVF@20%	Present value (Amount*PVF)
1	Sept 2021	Dividend	0.11	0.83333	0.09167
2	Sept 2022	Dividend	0.495	0.69444	0.34375
3	Sept 2023	Dividend	0.7425	0.57870	0.42969
4	Sept 2024	Dividend	1.11375	0.48225	0.53711
4	Sept 2024	value of equity	54.57375	0.48225	26.31836
				Total	27.72057

hence value of Virusator today is $27.72057 million

jeff jeffy answered 2 years ago

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