14) A pharmaceutical company discovers a new drug in its R&D department and obta

Question

14)
A pharmaceutical company discovers a new drug in its R&D department
and obtains a patent position. After the patent expires and others can now
produce the drug without fear of legal proceedings, do you expect the
overall profitability of drug decline ?
Yes No

15)
You are considering buying a company and you expect to pay $10
million for it. The present value of the projected after tax cash flows over
the next 30 years are anticipated to be either $12 million (Scenario A) or $8
million (Scenario B) depending on whether the company will have operating
costs of $3 million/year (Scenario A) or $5 million/year (Scenario B),
respectively. The WACC used for the PV calculations is 15%. All the
questions below start from the above set of conditions.
(A) You should buy the company if:
1. You are convinced the PV will be $12 million
2. You are convinced the PV will be $8 million
(B) If the WACC for the company decreases to 10%, what should you
be thinking ?
1. You shouldn

Explanation / Answer

14.Yes

15 A) You are convinced the PV will be $12 million

B) 2. You should re-do the PV calculations as now you

C) 2. You should re-do the PV calculations as now you may buy in either scenario

D) 3. Tell her that unless the WACC also goes down (less
than 15%) you that we shouldn

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