Question Four Answer all parts Show all your workings O'Flannagan, CFA, is attempting to value AltoXenica,...

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Question Four Answer all parts Show all your workings O'Flannagan, CFA, is attempting to value AltoXenica, a pharma company with significant research and development (R&D) expenses. To do so she has decided to capitalize its R&D expenses for the past 9 years (in $ millions). Year R&D 2020 3,955 2019 3,891 2018 3,864 2017 3,914 2016 3,847 2015 3,818 2014 3,752 2013 3,726 2012 3,663 AltoXenica recently reported the following results for 2020 (in $ millions): EBIT 7,246 Interest expense 628 Depreciation 7,166 Net working capital 1,580 Book value of equity 19,773 Book value of debt 13,956 Capex 8,561 Note: AltoXenica's net working capital balance was $1,444 in 2019. AltoXenica's tax rate is 35.0%. The Company has a beta of 1.25 and the risk-free rate and market risk premium are expected to be 2.0% and 5.0%, respectively. (i) Estimate the firm value of AltoXenica using the stable growth free cash flow (FCF) model. State any assumptions. (15 marks) (ii) Discuss the validity of the reclassification of R&D as performed by O'Flannagan. Your answer should also comment (with worked examples where appropriate) on the impact of the reclassification on both valuation and performance measures for AltoXenica. (15 marks) Question Four Answer all parts Show all your workings O'Flannagan, CFA, is attempting to value AltoXenica, a pharma company with significant research and development (R&D) expenses. To do so she has decided to capitalize its R&D expenses for the past 9 years (in $ millions). Year R&D 2020 3,955 2019 3,891 2018 3,864 2017 3,914 2016 3,847 2015 3,818 2014 3,752 2013 3,726 2012 3,663 AltoXenica recently reported the following results for 2020 (in $ millions): EBIT 7,246 Interest expense 628 Depreciation 7,166 Net working capital 1,580 Book value of equity 19,773 Book value of debt 13,956 Capex 8,561 Note: AltoXenica's net working capital balance was $1,444 in 2019. AltoXenica's tax rate is 35.0%. The Company has a beta of 1.25 and the risk-free rate and market risk premium are expected to be 2.0% and 5.0%, respectively. (i) Estimate the firm value of AltoXenica using the stable growth free cash flow (FCF) model. State any assumptions. (15 marks) (ii) Discuss the validity of the reclassification of R&D as performed by O'Flannagan. Your answer should also comment (with worked examples where appropriate) on the impact of the reclassification on both valuation and performance measures for AltoXenica. (15 marks)