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Finance problems Set of Two




Question;You should provide detailed solutions. Just providing a number as answer to a problem will not earn you any point. I need to see your solution process.Problem 1-Valuing a patent: Newgene is a bio-technology firm with a patent on a drug called Innovex, which has received FDA approval for use in treating diabetes. Assume you are trying tovalue the patent and that you have the following estimates for use in the option pricingmodel:? An internal analysis of the financial viability of the drug today, based upon the potential market and the price that the firm can expect to charge for the drug, yields a present value of cash inflows of $4.258 billion, prior to considering the initial development cost.? The initial cost of developing the drug for commercial use is estimated to be $3.672 billion, if the drug is introduced today.? The firm has the patent on the drug for the next 17 years and the current long-term treasury bond rate is 7.0%.? The average variance in firm value for publicly traded bio-technology firms is 0.21.a. What will be the NPV of the project if the firm starts developing the drug today rather than wait (2 points).b. What is the value of the patent today (4 points).Problem 2 ? Value equity in a distressed firm: Assume that you are valuing the equity in a firm whose assets are currently valued at $60 million, the standard deviation in this asset value is 45%. The face value of debt is $90 million (it is zero coupon debt with 10 years left to maturity). The 10-year Treasury bond rate is 6%.a. Estimate the value of the firm?s equity (4 points).b. Estimate the default spread (over and above the risk-free rate) that debt investors would charge for the firm?s debt (2 points).


Paper#48891 | Written in 18-Jul-2015

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