FINANCIAL MANAGEMENT

CASE STUDY: ARCADIAN MICROARRAY TECHNOLOGIES, INC.

EXECUTIVE SUMMARY

As an investment manager from Sierra Capital Partners, Rodney Chu is interested in purchasing a 60% equity interest of Arcadian Microarray Technologies, Inc., a biotechnology firm. The bid is currently at $40 million. The Arcadian’s managers have optimistic projections for their firms’ performance over the next 11 years.
However, based on Sierra’s calculations, come up a much more conservative view. With the request of Mr. Chu, a fair bid price could be calculated along with any appropriate counterproposals. Appropriate steady state growth rates and terminal values would be included and explained.

I. Objective
The main objective of this paper is to exercise the terminal value of a firm. The other objectives are to acknowledge: 1. Concept of terminal value 2. Various terminal value estimators along with its advantages and disadvantages 3. The use of tax on terminal value 4. Assumption on liquidation 5. Forecast horizon for estimating terminal value 6. Constant-growth valuation model and its derivation 7. Fisher’s formula for estimating growth rate to infinity 8. Triangulation of a terminal value estimate.
II. Analysis
We could see in the case that the lessor was trying to understand the lessee’s point of view. Thereby, the lessee’s financing problem is the lessor’s investment problem. This perspective would be explained thoroughly below.

2.1. Presentation and explanation of data in Exhibit 3
Based on Chu’s view, terminal value mostly affects stock price. The sample of Exhibit 3 is shown below.

The calculation would be:
(0.64x1.131)(1+0.112)1+(0.64x1.132)(1+0.112)2+(0.64x1.133)(1+0.112)3+(0.64x1.134)(1+0.112)4+(0.64x1.135)(1+0.112)5=3.36

2.2. Consideration and approaches described in Exhibit 4
Exhibit 4