4.Genzyme is a local biotechnology firm that invests heavily in research and development. (a) Currently, Genzyme re-invests...

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4.Genzyme is a local biotechnology firm that invests heavily inresearch and development.
(a) Currently, Genzyme re-invests all of its cashflows to helpfund new R&D. Investors expect Genzyme to produce zero netcashflows for the next 5 years. In the 6th year, Genzyme isexpected to have cashflows of $100 million, which is then expectedto grow at a constant rate of 8% forever. If investors require a13% rate of return, what is the current value of Genzyme? (Assumeall cashflows occur at the end of the year.)
(b) Genzyme announces that it has just discovered a new drug,Heartgo, to treat heart disease. The firm has already spent $40million developing Heartgo, and will have to spend an additional$10 million immediately to prepare the drug for sale. Heartgo isexpected to generate cashflows of $30 million for 10 years, withthe first cashflow received in one year. What is the new marketvalue of Genzymeafter the announcement?

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4.2 Ratings (856 Votes)

4a Terminal value at end of year 5 cash flow in year 6 required return constant growth rate Terminal value at end of year 5 100 million 13 8 2 billion Current value See Answer

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4.Genzyme is a local biotechnology firm that invests heavily inresearch and development.(a) Currently, Genzyme re-invests all of its cashflows to helpfund new R&D. Investors expect Genzyme to produce zero netcashflows for the next 5 years. In the 6th year, Genzyme isexpected to have cashflows of $100 million, which is then expectedto grow at a constant rate of 8% forever. If investors require a13% rate of return, what is the current value of Genzyme? (Assumeall cashflows occur at the end of the year.)(b) Genzyme announces that it has just discovered a new drug,Heartgo, to treat heart disease. The firm has already spent $40million developing Heartgo, and will have to spend an additional$10 million immediately to prepare the drug for sale. Heartgo isexpected to generate cashflows of $30 million for 10 years, withthe first cashflow received in one year. What is the new marketvalue of Genzymeafter the announcement?