Case Study: Arcadian Microarray Technologies, Inc. Essay
CASE STUDY: ARCADIAN MICROARRAY TECHNOLOGIES, INC.
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.
The main …show more content…
Price to Earning Ratio
Price to Book Ratio
2.5. Driver of “g”
Constant Growth Rate
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%
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