Dagmar Pharmaceutics, Inc. (DPI) is a startup that will provide drug treatments for pulmonary hypertension. DPI founders are seeking funds to finish the FDA approval process and increase production capacity to commercial scale. The FDA approval and scale-up will take two years, with revenues beginning in Year 3. The entrepreneurs have prepared financial projections and developed three scenarios that yield the CF forecast shown in the table. They have also assigned a probability to each scenario.

DPI is entirely equity financed and the CFs shown are the cash flows to stockholders.

The value period is six years, at the end of which the entrepreneurs anticipate two possible exits for investors:

1. If the success scenario is realized, DPI would go public. The continuing value multiple will be 10x DPI's Year 6 cash flow.

2. Under the expected scenario, DPI will be sold by acquisition to a customer or supplier interested in vertical integration. The continuing value multiple will be 6x DPI's Year 6 cash flow.

Additional information:

The beta on comparable companies is 0.75

The rate on Treasury bills is 2.50% and the expected market rate is 10%.

The correlation between DPIs cash flows and the market is 0.345.

The cash flows forecast is:

Estimate the value of the venture using the RADR and CEQ methods.

Scenario Success Likely Failure Probability 0.20 0.55 0.25 0 -$15,000 $15,000 $15,000 1 -$6,000 -$6,000 -$6,000 2 $4,500 $4,500 $3,000 3 $7,000 $5,000 $0 4 $8,500 $6,000 $0 5 $9,500 $7,000 $0 6 $10,000 $8,500 $0 Scenario Success Likely Failure Probability 0.20 0.55 0.25 0 -$15,000 $15,000 $15,000 1 -$6,000 -$6,000 -$6,000 2 $4,500 $4,500 $3,000 3 $7,000 $5,000 $0 4 $8,500 $6,000 $0 5 $9,500 $7,000 $0 6 $10,000 $8,500 $0