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The Ectoplasto Drug Company's Common Stock

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?

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The expected price next year is the sum of the products of probability and the ...

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The solution calculates the Drug Company's stock value

$2.19