CVRX Ltd., one of the worlds largest biotechnology companies, invests considerable amounts in research and development each year. In the most recent fiscal year (2020), the R&D expense was $500 million, the net income was $1,000 million, and the book value of equity was $8,000 million. The R&D expenses for the prior 3 years are as follows: $1,200 million (2019), $900 million (2018), and $600 million (2017).

1. Would you expect the Free Cash Flows to the Firm (FCFF) of CVRX Ltd. to increase or decrease as a result of the capitalisation of the R&D expenses? Please explain briefly in the space provided below.

(1 marks)

2. Please explain below why the capitalisation of R&D expenses changes the reinvestment rate of CVRX Ltd.. (2 marks)

3. Assuming an amortizable life of 3 years, determine the amortization of capitalised R&D in each of the R&D years. Please type your answer below. (4 marks)

Amortization in 2020 =

Amortization in 2019 =

Amortization in 2018 =

Amortization in 2017 = ....

4. Determine the total Value of Research Asset for CRVX and the R&D amortization expense for the current year. Please type your answer below. (2 marks)

Value of Research Asset in 2020 =

5. Compute the Net Income, Book Value of Equity (BVE) and Return on Equity (ROE) of the firm before and after capitalising the R&D expenses. Please type your answer below. (3 marks)

Net Income (before capitalisation) =

Net Income (after capitalisation) =

BVE (before capitalisation) =

BVE (after capitalisation) =

ROE (before capitalisation) =

ROE (after capitalisation) =

6. If the WACC of CRVX Ltd. decreased to 10% after capitalising the R&D expenses, should the company continue investing in Research and Development? Please explain briefly in the space provided below. (3 marks)