Question
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.
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