Rocky Mountain Advanced Genome -Case Analysis

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Background:Rocky Mountain Advanced Genome (RMAG) is headquartered in Colorado Springs, Colorado and has recently been founded by seven research scientists who have taken a leave of absence from major universities and pharmaceutical companies to establish this firm. This company uses gene-sequencing techniques with a computer-driven search algorithm to identify genes in human DNA.

In January 1996, negotiations were coming to the end for a private equity investment by Big Sur Capital Management to buy a 90 percent equity interest for $46 million in RMAG. The proceeds of the sale would be used to finance the growth of RMAG. Big Sur's saw a highly promising, but a highly risky investment opportunity. Kim McGraw, a managing director with Big
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Terminal Value Estimates:When estimating terminal value there are a few different ways to go about doing it. They are: accounting book value, liquidation value, replacement value, constant growth perpetuity value, discounted cash flows, price/earnings, value/EBIT, and price/book.

Accounting Book Value:Accounting book value estimates look at the original purchase price. We believe that accounting book value should not be used in valuing RMAG because it looks at the original purchase price and undervalues the company because value of RMAG is not in the assets it is in the future revenues. This is important because biotech revenues take years to reach maturity and it does not take into account future cash flows.

Liquidation Value:Liquidation value is the estimated amount of money that an asset or company could quickly be sold for, such as if it were to go out of business. This method would be used when the market price of equity drops below the liquidation value of the firm, the firm becomes attractive as a takeover target.

The liquidation method is appropriate when selling a business with considerable tangible assets; however it ignores the "going-concern" value. This is a problem when trying to value RMAG. We believe this method should not be used for RMAG because its value is not in its assets and it is in future cash flows.

Replacement Value:Replacement value is the current cost of replacing the firm's assets less its liabilities.

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