FIN 435 Case Study

FIN 435 Case Study his case written assignment is on Arcadian Microarray Technologies, In. (Case 44). Report Requirements: • Cover sheet with case name, date, team number and team members; • One or two page written report analyzing questions given; and • Exhibit with any financials, ratios, charts/graphs that you address in your report. Your analysis should cover the following concerns: 1. 3. 1.. Regarding the cash flow forecasts in case Exhibit 5, at what point in the future would you set the forecast horizon for the three investments? Why? More generally, what should determine when you stop forecasting annual cash flows and estimate a terminal value? 4. 2. Estimate other terminal values based on alternate estimation approaches. From these various estimates, please triangulate toward a single composite estimate of terminal value for each of Sierra Capital and Arcadian’s forecasts. What is the resulting present value (PV) of cash flows under Sierra Capital and Arcadian’s outlook? How significant was TV in creating the difference between the two present value estimates? 5. 3. As a general matter in valuation work, how much attention should terminal value garner? What short list of questions about TV could you keep on hand in case a client asked you to opine on a valuation of that company? Case 42: Arcadian Microarray technologies Inc 1. Prepare to explain the implications of case exhibit 1 (Paige Simon’s first task). Based on that exhibit, is terminal value material component of firm values? According to Chu, the stock price is not explained by the present value of five­year dividends. He believes that it is because of terminal value. The exhibit shows that the percentage of market price not attributable to dividends has most percentage (Average 93%). 2. Drawing on case Exhibit 4 and your own general knowledge, where would the various estimators be appropriate? Where would they be inappropriate? (Simon’s second task) Liquidation Value is appropriate if the firm will stop operation and sell the assets to highest bidders. The limitation is that this estimator uses book value and it does not reflect the earning power of assets. In Multiple Approach, the value of a firm in future is estimated by applying a multiple to the firms’ revenue that year. This estimator is considered as simple but critical due to the use of comparable firms multiples. In comparison to liquidation value estimator, Growth model considers a firm can reinvest its cash flows back to new assets and expand the life. DCF method reflects time value and theoretically based, but considered as time consuming. 3. Regarding the cash flow forecasts in case Exhibit 5, at what point in the future would you set the forecast horizon for the three investments? Why? More generally, what should determine when you stop forecasting annual cash flows and estimate a terminal value? I would set the forecast horizon at 3rd year for Toll road, 13th year for bottling plant ad 27th year for movie studio. This point is where I stop forecasting annual cash flows. From that point the investments will generate steady growth for each one. V(future)= V(present)*(1+g)n = g=n√Vf/Vp ­1 Growth rate(road)= 3 √288/169­ 1=1.194­1=0.194 Growth rate(plant)= 200/280=13 √280/200­1=1.026­1=0.026 Growth rate(studio)=255/270=27 √270/255­1=1.002­1=0.002 TV(road)= cash flow t+1/WACC = 277/(0.2­0.194)= 4,617 TV(Plant)=204/(0.2­0.026)=1,172 TV(studio)=­20/(0.2­0.002)=­101.1 4. Estimate other terminal values based on alternate estimation approaches. From these various estimates, please triangulate toward a single composite estimate of terminal value for each of Sierra Capital and Arcadian’s forecasts. Growth model TV= Cash flow*(1+g)/WACC­g Annual growth rate to infinity 2% 3% 4% 5% 6% 7% WACC 20% 20% 20% 20% 20% 20% Cash flow (Arc ($203) ($203) ($203) ($203) ($203) ($203) Cash flow (Sie (58) (58) (58) (58) (58) (58) TV arc (1,150) (1,230) (1,320) (1,421) (1,537) (1,671) TV sie (329) (351) (377) (406) (439) (477) 5. As a general matter in valuation work, how much attention should terminal value garner? What short list of questions about TV could you keep on hand in case a client asked you to opine on a valuation of that company? I think terminal value is one of the important concepts to consider when doing valuation for a company. Because it represent the present value of future cash flows at a future point of time when the growth becomes stable. - Expected growth rate - Future Cash flows