4. You work for a Genome Drugs, small biotechnology company that has a 10-year patent for...

 

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4. You work for a Genome Drugs, small biotechnology company that has a 10-year patent for a drug that it plans to license to a larger pharmaceutical company and it has two offers: • Biogen has offered to pay $100 million today and $50 million a year, each year for the next 5 years. Merck has offered to pay $50 million today and share 15% of net income, expected to be $400 million annually, each year for the next 10 years. The following table lists financing costs of Pfizer and Merck: After-tax cost of debt Pre-tax cost of debt Cost of equity 5.00% 12.00% 3.75% 3.00% 4.00% 9.00% Which offer would create more value for you? Biogen Merck Cost of capital 10.00% 7.50% (4 points) 4. You work for a Genome Drugs, small biotechnology company that has a 10-year patent for a drug that it plans to license to a larger pharmaceutical company and it has two offers: • Biogen has offered to pay $100 million today and $50 million a year, each year for the next 5 years. Merck has offered to pay $50 million today and share 15% of net income, expected to be $400 million annually, each year for the next 10 years. The following table lists financing costs of Pfizer and Merck: After-tax cost of debt Pre-tax cost of debt Cost of equity 5.00% 12.00% 3.75% 3.00% 4.00% 9.00% Which offer would create more value for you? Biogen Merck Cost of capital 10.00% 7.50% (4 points)

Answer rating: 100% (QA)

SOLUTION To determine which offer would create more value we need to calculate the present value of ... View the full answer