Essay on Case Study: Rocky Mountain Advanced Genome Inc

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Case Study: Rocky Mountain Advanced Genome Inc

In order to provide an accurate valuation of RMAG, the forecast horizon needs to reach the maturity stage the firm’s growth. The product that will take the longest to be marketed, Human Therapeutics is not expected to be earning revenues for RMAG for 4-7 years therefore to allow these products to reach their maturity in generating cash flows, a horizon for longer than 10 years is recommended. 15 years was used for this analysis to ensure that the terminal value of the company was determined when the company is mature not in the growth stage which could greatly skew results.
In order to forecast free cash flow, the first assumptions that had to be made were in regards to sales growth for
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Therefore it has been assumed that it will take 6 years to realise revenue, longer than RMAG’s forecast but shorter than Big Sur’s conservative valuation. The sales growth was expected to follow a similar pattern to the other products.
COGS was determined to be 39% of sales as a mean from forecasts provided by RMAG and Big Sur. This mean was consistent for both valuations. Contract revenue was assumed to stay fairly constant at $4 million per annum after 2000.
Research and Development costs make up a significant portion of RMAG’s expenses. This is due to the nature of the company and the high investment required developing its products. These R&D costs are assumed to be very high in the near future however as the products are developed and moved onto FDA approval, these R&D costs will begin to decrease and SG&A costs will begin to take over as the main expense as the products are taken to market.
As the company is assumed to be financed with joint ventures and capital, there is no interest expense for RMAG as there is no debt. An effective tax rate of 30% has been used and the company is assumed to not be expecting to pay a dividend in the forecast period.

In calculating free cash flow the following assumptions were made; Increase in accounts receivable was determined using the following formula; the average collection period was assumed to be 30 which is standard for

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