In 2005, Arcadian Microarray technologies, Inc. were in talks with Sierra Capital Partners to sell a 60% equity interest for $40 million to fund the growth of the company. Sierra Capital is a private equity investment company with $2 billion under management and a portfolio of 64 venture capital investments and leverage buyouts focusing strictly on the life sciences sector. Arcadian Microarray is a biotechnology firm founded in 2003 and located in Arcadia, California. The business was made up of 2 segments, DNA microarrays and human therapeutics. Due to the highly risky and complicated nature of this industry, managing director of Sierra Capital Rodney Chu, was hesitant on the cash flow projections put forth by Arcadian. The final steps…show more content… As shown in the text in Exhibit 6, using a 5% annual growth rate to infinity would only yield a total PV of $35 million. Selling a 60% equity interest to Sierra Capital Partners for $40 million would barely cover the cash insufficiency Sierra projected for next year (2005). This tells us that there is a need for further, more extensive financing for the years to follow (2006+).
We also calculated the terminal value estimates of Arcadian using a P/E multiples. The expected P/E multiples were provided (15-20) that result from the investment from Sierra Capital, we calculated the PV of the terminal values by using a WACC of 20%. In calculating the terminal value, our team used the last year in the forecast with a 5% nominal rate and discounted it back to present day along with all the other forecasted FCFs. Using P/E multiples, we estimated the terminal value by multiplying the net income for Arcadian in 2014, by 15 and 20 (Exhibit 1). Next, we calculated the total present value with the terminal value plus the negative PV free cash flow. Finally, the equity amount proposed to sell was calculated by 60% of total present value.
The sensitivity analysis run for us indicates that regardless of the growth rate we are expecting a significantly positive net present value. With a growth rate at only 2% we expect our present value to be over $33 and that's the most