Benoit Pharmaceuticals, Inc. was formed in 1990 by Richard Benoit, PhD. Formerly a research scientist with...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Benoit Pharmaceuticals, Inc. was formed in 1990 by Richard Benoit, PhD. Formerly a research scientist with a major pharmaceutical, he decided to strike out on his own. He owned 100% of the stock of the Princeton, New Jersey based manufacturer. The firm had been hugely successful by manufacturing aspirin and acetaminophen products. Flush with cash, Benoit felt that it was the time to take a chance on a product that might be a home run. Two researchers at Johns Hopkins had been doing promising work in oncology, and might be able to develop some effective cancer treatments. He felt that he could hire them away, set up an R&D facility, and within five years get back 10 times his investment. The scientists plus support staff would earn $500,000 per year, annual operating costs would be another $100,000, and an up-front investment of $1 million in lab equipment would be necessary. His tax consultant estimated that a $400,000 tax benefit would occur in the first year, with $200,000 in tax benefits occurring in each of the next five years. The tax benefits would come primarily from a tax credit for research and development. The investment was risky, with an industry average success rate of 50% in oncological products. Although there was enough free cash flow to finance the investment internally, Benoit preferred to finance it with external financing. Borrowing would be at 12%. Or he could spin the R&D operation off into a separate subsidiary, issuing stock to venture capitalists. The venture capitalists would expect an eventual return of 200%. If the subsidiary were formed as a partnership, some of the tax benefits might flow through to the venture capitalists. What would you recommend? Benoit Pharmaceuticals, Inc. was formed in 1990 by Richard Benoit, PhD. Formerly a research scientist with a major pharmaceutical, he decided to strike out on his own. He owned 100% of the stock of the Princeton, New Jersey based manufacturer. The firm had been hugely successful by manufacturing aspirin and acetaminophen products. Flush with cash, Benoit felt that it was the time to take a chance on a product that might be a home run. Two researchers at Johns Hopkins had been doing promising work in oncology, and might be able to develop some effective cancer treatments. He felt that he could hire them away, set up an R&D facility, and within five years get back 10 times his investment. The scientists plus support staff would earn $500,000 per year, annual operating costs would be another $100,000, and an up-front investment of $1 million in lab equipment would be necessary. His tax consultant estimated that a $400,000 tax benefit would occur in the first year, with $200,000 in tax benefits occurring in each of the next five years. The tax benefits would come primarily from a tax credit for research and development. The investment was risky, with an industry average success rate of 50% in oncological products. Although there was enough free cash flow to finance the investment internally, Benoit preferred to finance it with external financing. Borrowing would be at 12%. Or he could spin the R&D operation off into a separate subsidiary, issuing stock to venture capitalists. The venture capitalists would expect an eventual return of 200%. If the subsidiary were formed as a partnership, some of the tax benefits might flow through to the venture capitalists. What would you recommend?
Expert Answer:
Answer rating: 100% (QA)
Before making a recommendation its important to analyze the financial feasibility of the investment opportunity Based on the information provided the following assumptions can be made The initial inve... View the full answer
Related Book For
Fundamentals of Financial Management
ISBN: 978-0324597707
12th edition
Authors: Eugene F. Brigham, Joel F. Houston
Posted Date:
Students also viewed these accounting questions
-
A recent Pew Research poll asked respondents to fill in the blank to this question: The country ____ when it comes to giving equal rights to women with one of three choices. The results are shown in...
-
Planning is one of the most important management functions in any business. A front office managers first step in planning should involve determine the departments goals. Planning also includes...
-
Water is pumped in through the bottom of the tank in Exercise 19. How much work is done to fill the tank (a) To a depth of 2 feet? (b) From a depth of 4 feet to a depth of 6 feet? Data from in...
-
Explain which mechanism is preferred in these reactions and show the majorproducts: Br b) 1-BUOH 0- PROH Br . EIOH, reflux OTs d) DMF + CH,CO + KOH Ph Br Br . ELOH ELOH f) e) + CH,CH,0
-
What factors are needed in determining the size of a sample?
-
Information technology is continually changing the nature of accounting and the role of accountants. Write a two-page report describing what you think the nature of the accounting function in a large...
-
Mrs. Crawford will receive $7,600 a year for the next 19 years from her trust. If a 14 percent interest rate is applied, what is the current value of the future payments?
-
Each day, an electronics manufacturer creates thousands of small fan motors for computers. The speed (i.e., revolutions per minute) with which the motors run must be in a certain range. Motors that...
-
Kate Collins has opened Fontina and Stuff, a wholesale grocery and cheese company. The following transactions occurred in February: Required 1. Journalize the transactions. Beginning balances of...
-
Suppose Gabor, a scuba diver, is at a depth of 15 m. Assume that: 1. The air pressure in his air tract is the same as the net water pressure at this depth. This prevents water from coming in through...
-
FIRST PROJECT MEMO: Sling TV stands out from other streaming services because it gives the flexibility to customize packages with add-on channels at a more affordable price, allowing viewers to move...
-
1. Translate the following C code to RISC-V assembly (assume a, b, c are in x5, x6, x7): int a = 12; int b = 42; int c; c = b++ a; printf("%d", c);
-
se the information provided below to prepare the Statement of Comprehensive Income of Cheshire Ltd for the year ended 3 1 December 2 0 2 3 . INFORMATION The information given below was extracted from...
-
The following transactions occurred during August: (a) Invested cash in the business, $30,000. (b) Purchased a used van for cash, $8,000. (c) Purchased plumbing equipment on account, $4,000. (d)...
-
In your new role as Chief Human Resources Officer (CHRO) for a major retail organization, you have been tasked within the first 30 days by the CEO to conduct a presentation to the management team on...
-
Given matrix A shown below, find -4A. Give your answer as a matrix using the matrix tool. Provide your answer below: 3 -2 A = 0 0 2 -4 3 5
-
United Business Forms capital structure is as follows: Debt ............................................ 35% Preferred stock ........................... 15 Common equity .......................... 50...
-
Haleys Graphic Designs Inc. is considering two mutually exclusive projects. Both projects require an initial investment of $10,000 and are typical average-risk projects for the firm. Project A has an...
-
Suppose 2-year Treasury bonds yield 4.5%, while 1-year bonds yield 3%. r* is 1%, and the maturity risk premium is zero. a. Using the expectations theory, what is the yield on a 1-year bond 1 year...
-
Robert Black and Carol Alvarez are vice presidents of Western Money Management and codirectors of the companys pension fund management division. A major new client, the California League of Cities,...
-
Consider the Bayesian model for \(\tau=\left\{x_{1}, \ldots, x_{n} ight\}\) with likelihood \(g(\tau \mid \mu)\) such that \(\left(X_{1}, \ldots, X_{n} \mid \mu ight) \sim_{\text {idd }}...
-
Consider the sequence \(w_{0}, w_{1}, \ldots\),where \(w_{0}=g(\boldsymbol{\theta})\) is a non-degenerate initial guess and \(w_{t}(\boldsymbol{\theta}) \propto w_{t-1}(\boldsymbol{\theta}) g(\tau...
-
Let \(X \sim \operatorname{Gamma}(\alpha, \lambda)\). Show that the pdf of \(Z=1 / X\) is equal to \[ \frac{\lambda^{\alpha}(z)^{-\alpha-1} \mathrm{e}^{-\lambda(z)-1}}{\Gamma(\alpha)}, \quad z>0 \]
Study smarter with the SolutionInn App