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“what was the value of the opportunity?” and determining the overall value of the firm. You must prepare documentation to support your valuation and your conclusions. Analysis must include a decision tree.
Topics and/or issues that you could explore and discuss in the case
1. What are the main risks facing the business? Why did it diversify? Why is it difficult to value? Why does it want to go to an IPO now?
2. What would a standard DCF approach look like? What are the problems with this?
3. What does a probability tree look like? How do we get taxes right here? What valuation did you reach?
4. Optional-You can possibly use Black Scholes to allow for the fact that revenue and cost uncertainty is most likely continuous. How would you use it and what sensitivity analysis would you wish to conduct, and what is their impact on value?
5. What are the principal sources of uncertainty facing Aqua Bounty? Does it make sense for the firm to launch an IPO now?
6. Baseline projections for Aqua Bounty’s revenues and costs from their product are given in Exhibit 5. Note that these will be realized only if FDA approval is received for the product, which the company estimates as being a one-in-three chance. Assuming that approval is forthcoming, Aqua Bounty believes that there is an equal chance of each of the three commercialization scenarios occurring. Under the “low” scenario, revenues would be 75% lower than under the “baseline”; under the ‘high” scenario, revenues would be 75% higher. In all three scenarios, COGS will be 20% of revenues, and annual SG&A costs of 4M plus 5% of revenues will be incurred. Commercialization costs would be the same in all three scenarios, as shown in exhibit 5.
7. Build a simple cash flow model for Aqua Bounty’s revenues from it AquAdvantage fish, assuming that FDA approval is received. Use this to calculate the value of the product line under each of the three scenarios given. For each scenario, calculate:
a. The PV of FDA approval costs (discounted a rf)
b. The PV of product commercialization costs (discounted at rf)
c. The PV of the free cash flows from the product line, not including commercialization costs or FDA approval costs (discounted at rA-cost of capital)
You should assume:
• Aqua Bounty will face costs of 2.5M per year for the first three years, associated with it regulatory trials and submissions.
• No interest payments, as the firm’s debts will be paid in full using revenues from the IPO.
• A corporate tax rate of 35%.
• An unlevered cost of capital of 14%
Using your estimates of the costs and revenues generated above, sketch out a decision tree incorporating regulatory and commercialization uncertainty. What would be the value of the product if Aqua Bounty were to proceed with commercialization in each of the three scenarios? What if Aqua Bounty pursued commercialization only if, at that stage, the product were to have an NPV greater than zero?
How would further delay in the FDA process affect the valuation of the product line? Which factors within the real option framework would drive this?
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