What is the new market value of VRL

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Reference no: EM132621859

Question - Vaccine Research Limited (VRL) is a biotechnology firm that invests heavily in research and development for vaccines.

(i) Currently, VRL re-invests all of its cash flows to help fund new R&D. Investors expect VRL to produce net cash inflows of $120 million annually for the next 2 years. In the 3rd to the 5th year, cash flows are expected to grow by 15% annually. Beyond the 5th year, cash flows are expected to grow at a constant rate of 2.5% forever. If investors require a 12% rate of return, what is the current value of VRL? (Assume all cashflows occur at the end of the year.)

(ii) VRL announces that it has just discovered a new vaccine, Coronacure, to treat Covid-19. The firm has already spent $120 million developing Coronacure and will have to spend an additional $95 million immediately to prepare the vaccine for sale. Coronoacure is expected to generate cashflows of $140 million for 3 years, with the first cash inflow in one year. What is the new market value of VRL after the announcement?

Reference no: EM132621859

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