Genzyme is a biotechnology firm that invests heavily in research and development (R&D). Genzyme currently has 29 million ordinary shares outstanding and a net debt of 192 million. Currently, Genzyme re-invests all of its cashflows to help fund new R&D.

a. As an analyst you forecast Genzyme to produce zero net cashflows for the next 4 years. From the 5th year, Genzyme is expected to have cashflows of 130 million forever. If investors (debt and equity) require a 12% rate of return, what is the value of the entity as a whole? What is the value of one ordinary share (equity) of the firm?

b. Genzyme announces that it has just discovered a new drug, Heartgo, to treat heart disease which is patented for 4 years. Analysts, now expect Genzyme to produce cashflows of 750 million for the next 4 years. In the 5th year, Genzyme is expected to have cashflows of 150 million which will grow at 6% forever. If investors (both debt and equity) require a 12% rate of return, what is the new value of the firm as a whole (entity) after the announcement? What is the value of one ordinary share (equity) of the firm after the announcement?

c. Suppose the current market price after the announcement of the discovery of the new drug, Heartgo (Question 5b) is 130. Explain why your estimated value of the equity is different to that of the market?