Corporate finance-valuation analysis

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Corporate Finance - Valuation Analysis

You should provide detailed solutions.

Problem 1-Valuing a patent: Newgene is a bio-technology firm with a patent on a drug called Innovex, which has received FDA approval for use in treating diabetes. Assume you are trying to value the patent and that you have the following estimates for use in the option pricing model:

  • An internal analysis of the financial viability of the drug today, based upon thepotential market and the price that the firm can expect to charge for the drug, yields apresent value of cash inflows of $4.258 billion, prior to considering the initialdevelopment cost.
  • The initial cost of developing the drug for commercial use is estimated to be $3.672billion, if the drug is introduced today.
  • The firm has the patent on the drug for the next 17 years and the current long-termtreasury bond rate is 7.0%.
  • The average variance in firm value for publicly traded bio-technology firms is 0.21.

a. What will be the NPV of the project if the firm starts developing the drug today rather than wait.

b. What is the value of the patent today.

Problem 2 - Value equity in a distressed firm: Assume that you are valuing the equity in a firm whose assets are currently valued at $60 million; the standard deviation in this asset value is 45%. The face value of debt is $90 million (it is zero coupon debt with 10 years left to maturity). The 10-year Treasury bond rate is 6%.

a. Estimate the value of the firm's equity.

b. Estimate the default spread (over and above the risk-free rate) that debt investors would charge for the firm's debt.

Reference no: EM13847941

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