Johnson & Johnson is entering in the biotechnologies and Pharmaceutical business. Johnson & Johnson is expecting to finance this new activity using both debt and equity. Since the products that Johnson & Johnson is about to launch are close to three major Pharmaceutical companies already operating in the market, the management has decided to use these companies as benchmark to asses the risk profile. Information about the companies is reported below:

Company Stock Price Number of Shares Merk & C o. 33 6,000,000 P fizer 30 6,800,000 E li L illy and C o. 32 5,300,000

Company Debt Merk & C o. 180,000,000 P fizer 200,000,000 E li L illy and C o. 190,000,000

Company -Equity Merk & C o. 1.34 P fizer 1.41 E li L illy and C o. 1.32

1. Compute the total market value for each company. Hint: market value is equal to: Market value = (stock price) (number of shares)

2. Compute the un-levered beta for the pharmaceutical business. Assuming a corporate tax rate equal to 30% and _D=0 for each company.

3. Compute the re-levered beta for Johnson and Johnson assuming the following capital structure: (D/V) =0.5 and (E/V) = 0.5 and also corporate tax rate equal to 30% and _D= 0

4. Using the following assumption perform a project evaluation using both the WACC, APV and FTE method, assuming that the project will last for five years and the EBIT will grow at a 5% rate per year, depreciation is over the five years of the project and it is equal to 20% of Capex per year (200) and there is no terminal or salvage value. Note this is a not perpetuity case. Values are in Millions of USD.

Assumptions EBIT (w/ 5% growth) 1000 Tax rate 30% Equity 500 Depreciation 200 Debt 500 Capex 1000 Interest Rate on Debt 8% Working Capital 0 Risk Free Rate 5.0% D/V (d) 0.5 Equity Premium 8.0% E /V 0.5

Note that the project Capex of 1,000 is financed with 50% equity and 50% debt.

Hints: Recall that WACC, APV and FTE method must deliver the same outcome. Start with WACC method and then work out the remaining two.

The cost of capital in the case of not perpetuity is computed as:

Un-levered Cash Flow is used for the WACC and APV method, while the Levered Cash Flow is used for FTE method. When building the Levered and Un-levered cash flows do not include the capex as they are assumed to occur at period 0 and the first cash flow occur at period one. To compute the Debt Rebalancing you must use the initial level of debt of Johnson & Johnson. Refer to the handout on the company and project evaluation for further hints and tips.