Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

9.G, a biotechnology firm, has recently reinvested all of its earnings into R&D. The market expect G to generate net zero annual cashflows for the

9.G, a biotechnology firm, has recently reinvested all of its earnings into R&D. The market expect G to generate net zero annual cashflows for the next 5 years. Then in the 6th year, the company is expected to generate a net cashflow of $100 million. From then on, the company is expected to generate the same cashflow for every year, until infinity(!). If the required rate of return of the market is assumed constant at 13%, what would be the current value of G (choose the most accurate answer, assuming all cashflows occur by the end of the year)? Hint: you might want to refer back to the present value of different types of cashflows that we already discussed. Identify the type of cashflows in this case. Also pay attention to the timing of the cashflows.

Follow up with Question 9, the company announces that it has discovered a new drug. The investment spent initially for R&D is $40 million. Another $10 million will be spent right now for further development of the drug. Then, starting from the next year, the drug is expected to generate an annual net cashflow of $30 million for the new drug for the next 10 years. Required rate of return is still 13%. Does this look to you that the announcement of this new drug is going to drive the company's value to the moon? *

a.To the moon!

b.To the ground!

c.Going nowhere.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Management Theory And Practice

Authors: Eugene F. Brigham, Michael C. Ehrhardt

10th Edition

0030329922, 9780030329920

More Books

Students also viewed these Finance questions