Case Study: Arcadian Microarray Technologies, Inc. Essay

1300 Words Feb 25th, 2015 6 Pages
FINANCIAL MANAGEMENT

CASE STUDY: ARCADIAN MICROARRAY TECHNOLOGIES, INC.

EXECUTIVE SUMMARY

As an investment manager from Sierra Capital Partners, Rodney Chu is interested in purchasing a 60% equity interest of Arcadian Microarray Technologies, Inc., a biotechnology firm. The bid is currently at $40 million. The Arcadian’s managers have optimistic projections for their firms’ performance over the next 11 years.
However, based on Sierra’s calculations, come up a much more conservative view. With the request of Mr. Chu, a fair bid price could be calculated along with any appropriate counterproposals. Appropriate steady state growth rates and terminal values would be included and explained.

I. Objective
The main
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Interpretation of Exhibit 6
Price to Earning Ratio

Price to Book Ratio

2.5. Driver of “g”
Constant Growth Rate
Options:
1. Real growth rate in the economy = 3% 2. Real growth rate in the Pharmaceutical Industry = 5% 3. USA Population growth = 1%

Nominal Rates 1. Nominal growth rate in the economy ~ 5% 2. Nominal growth rate in the Pharmaceutical Industry ~ 7% 3. USA Population growth = 1%

Best Rate: Nominal growth rate in the economy ~ 5%
Low Ran

Low Ran

High Range
High Range

2.6. Estimation of terminal values by using multiples and preparation of present value by using them

Estimating Terminal Value using: * P/E Ratio * P/BV Ratio * Constant Growth Rate

a. PRICE TO EARNINGS RATIO Arcadian’s View | P/E Ratio | 15 | 20 | Net Income 2014 | $203 million | $203 million | Terminal Value | 15 x $203 million = $3,045 million | $4,060 million | PV of Terminal Value | $3,045 million/(1+0.2)^10 = $492 million | $656 million | PV of 2005-2014 Cash Flow | $(151 million) | $(151 million) | Total PV | $492 million - $151 million= $341 million | $505 million |

Sierra’s View | P/E Ratio | 15 | 20 | Net Income 2015 | $162 million | $162 million | Terminal Value | 15 x $162 million = $2,430 million | $3,240 million | PV of Terminal Value | $2,430

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