Question 1Question 2

Allergan is a major pharmaceutical firm. You work for Allergan's CFO and are evaluating a major and expensive drug trial. The drug trial would require an investment of $95 million today If the trial succeeds, the drug will be worth $1 billion in a year. You estimate that there is only a 10% chance that the trial succeeds. If the trial fails, then in a year you will scrap the project and it will be worth nothing-the entire $95 million will be gone. Whether the venture succeeds or fails is independent of general market conditions. The risk-free rate is 3%, the expected return of the market is 12%, and the standard deviation of the market return is 20%. Ignore taxes. What is the beta of the drug trial? What is the appropriate discount rate for the project under the assumptions of CAPM? 0;3% 1;12% 1;15% 0;20% Allergan is a major pharmaceutical firm. You work for Allergan's CFO and are evaluating a major and expensive drug trial. The drug trial would require an investment of $95 million today If the trial succeeds, the drug will be worth $1 billion in a year. You estimate that there is only a 10% chance that the trial succeeds. If the trial fails, then in a year you will scrap the project and it will be worth nothing-the entire $95 million will be gone. Whether the venture succeeds or fails is independent of general market conditions. The risk-free rate is 3%, the expected return of the market is 12%, and the standard deviation of the market return is 20%. Ignore taxes. What is the NPV of the project? $775 million $95 million $870 million \$2.1 million Allergan is a major pharmaceutical firm. You work for Allergan's CFO and are evaluating a major and expensive drug trial. The drug trial would require an investment of $95 million today If the trial succeeds, the drug will be worth $1 billion in a year. You estimate that there is only a 10% chance that the trial succeeds. If the trial fails, then in a year you will scrap the project and it will be worth nothing-the entire $95 million will be gone. Whether the venture succeeds or fails is independent of general market conditions. The risk-free rate is 3%, the expected return of the market is 12%, and the standard deviation of the market return is 20%. Ignore taxes. What is the beta of the drug trial? What is the appropriate discount rate for the project under the assumptions of CAPM? 0;3% 1;12% 1;15% 0;20% Allergan is a major pharmaceutical firm. You work for Allergan's CFO and are evaluating a major and expensive drug trial. The drug trial would require an investment of $95 million today If the trial succeeds, the drug will be worth $1 billion in a year. You estimate that there is only a 10% chance that the trial succeeds. If the trial fails, then in a year you will scrap the project and it will be worth nothing-the entire $95 million will be gone. Whether the venture succeeds or fails is independent of general market conditions. The risk-free rate is 3%, the expected return of the market is 12%, and the standard deviation of the market return is 20%. Ignore taxes. What is the NPV of the project? $775 million $95 million $870 million \$2.1 million