Case 42 Essay

1536 Words Mar 28th, 2013 7 Pages
Introduction
Sierra Capital Partners is an investment company in Albuquerque, New Mexico. They were organized in 1974 as a hedge fund, and quickly grew over the years with great success in private equity investments. Sierra focused primarily on the life sciences sector. In the early 2000’s, Sierra was burned by many young firms’ new discoveries that failed to work out. Their new motto for evaluating investments became, “NRDO: no research, development only.” Arcadian Microarray Technologies was founded in 2003 by research scientists, some of whom were previously involved in a very successful project called the Human Genome Project. Those scientists helped find links between variations in a person’s genetic code and their predisposition
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We recommend that a moderate forecast be used to give the most appropriate answer. We created a new income statement that is an average of the two previous forecasts. We took the data from both of the income statements and added them together and divided by two to get what we feel is a moderate forecast. The data that we calculated is listed below in the table. 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Total sales 2 9 31 77 158 282 436 563 676 722 779
Net income (12) (22) (17) (7) 2 18 28 37 61 94 157
Free cash flow (31) (34) (31) (35) (21) 2 30 53 64 81 164
Terminal Value 1069
FCF + Terminal Value (31) (34) (31) (35) (21) 2 30 53 64 81 1233

We then applied the Discounted Cash Flow method to the new forecast and found the maximum bid that Sierra should pay for a 60% state in Arcadian. Our results showed that a bid of approximately 35 million dollars would cover the required rate of return of 20%. If Sierra is required to pay anything over 35 million dollars, the return will not cover the cost of capital requirement of 20%. On the other hand, any other offers that are below 35 million dollars give Sierra a return that is over the required WACC of 20%.
WACC 20%
Total PV 127.86
60% Equity 76.72
NPV 41.72 Effective Return ($35) $41.72 20%

The chart below shows the expected return given the initial investment. At a purchase price of $40

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