Rocky Mountain Advanced Genome, Inc

20 Pages Posted: 21 Oct 2008

See all articles by Robert F. Bruner

Robert F. Bruner

University of Virginia - Darden School of Business

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Abstract

In January 1996, an investment manager of a hedge fund is considering purchasing an equity interest in a start-up biotechnology firm, Rocky Mountain Advanced Genome (RMAG). The asking price is $46 million for a 90% equity interest. Although managers of the firm are optimistic about its future performance, the investment manager is more conservative in her expectations. She asks an analyst to fashion a counterproposal for RMAG's management. The tasks for the student are to apply the concept of terminal value, interpret completed analyses and data, and derive implications of different terminal value assumptions in an effort to recommend a counterproposal. Little computation is required of the student. The main objective of the case is to survey many conceptual and practical challenges associated with estimating a firm's terminal value. Issues addressed include the concept of terminal value; the materiality of the terminal-value assumption; the varieties of terminal-value estimators and their strengths and weaknesses; taxation of terminal values; when to assume liquidation versus going-concern terminal values; choosing a forecast horizon at which to estimate a terminal value; the constant growth valuation model, its derivation, limiting assumptions of constant growth to infinity, and WACC > g; use of the Fisher Formula as a foundation for estimating growth rate to infinity; and using a variety of estimates to "triangulate" in on a terminal value.

Excerpt

UVA-F-1136

Version 1.3

ROCKY MOUNTAIN ADVANCED GENOME, INC.

In January 1996, negotiations neared conclusion for a private equity investment by Big Sur Capital Management Company in Rocky Mountain Advanced Genome (RMAG). The owners of RMAG, who were also its senior managers, proposed to sell a 90% equity interest to Big Sur for $ 46 million. The proceeds of the equity sale would be used to finance the growth of the firm. Big Sur's due diligence study of RMAG had revealed a highly promising high-risk investment opportunity. It remained for McGraw, a managing director with Big Sur, to negotiate the specific price and terms of investment. McGraw aimed to base her negotiating strategy on an assessment of RMAG's economic value, and to structure the interests of Big Sur and the managers of RMAG to create the best incentives for value creation.

McGraw's analysis so far had focused on financial forecasting of equity cash flows. The final steps would be to estimate a terminal value, or continuing value, for the company and to discount the cash flows and terminal value to the present. She also sought an assessment of forecast assumptions. In that regard, she requested help from Janice Kelley, a new associate with Big Sur.

Big Sur Capital Management Company

. . .

Keywords: cash flow, financing, hedging, valuation, venture capital, diverse protagonist, general (female protagonist)

Suggested Citation

Bruner, Robert F., Rocky Mountain Advanced Genome, Inc. Darden Case No. UVA-F-1136, Available at SSRN: https://ssrn.com/abstract=909378

Robert F. Bruner (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-3823 (Phone)
434-924-0714 (Fax)

HOME PAGE: http://faculty.darden.edu/brunerb/

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