The Next Ultimate Growth Stock

The Next Ultimate Growth Stock: "The method to our madness Let's imagine that fictitious biotech start-up 'Cure-All' trades at $5 per share and has 10 million shares outstanding. The company will be spending $10 million each year to develop a late-stage drug for the next four years. The new drug comes on the market in the fifth year and will return $100 million each year thereafter. We might use a discount rate of 15% for this company. (Think of the discount rate as the rate of return you would require on your investment, given a particular level of risk.) To value any company, we must first add the present value of all future cash flows. You can determine the terminal value (year five and beyond) by dividing the $100 million cash flow by the discount rate. We would then need to determine the present value of that figure. The numbers would look like this: Year 1 Year 2 Year 3 Year 4 Year 5 Onward Cash Flows ($10 million) ($10 million) ($10 million) ($10 million) $100 million/.15 = $667 million After that, it's just a matter of taking the present value of each of the cash flows: (-10/1.15) + (-10/1.152) + (-10/1.153) + (-10/1.154) + (667/1.155) = $303.3 m"