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It is January 2015. You work as a financial analyst for Merck & Co. and are tasked with the due diligence on the proposed acquisition of a biotech startup. You estimated the following cash flows for the startup: Year Expected free cash flow to the firm ($ million) (end of year) 2015 87 2016 130.5 2017 169.65 2018 203.58 2019 223.94 After 2019, free cash flows are expected to grow by 3% per year. Based on the riskiness of your industry, you think that your weighted average cost of capital is 12%. The biotech firm has 5 million shares and bonds worth $120 million outstanding.

a) What is the terminal value, i.e., the present value of all free cash flows from 2020 to infinity expressed in 2019-dollars (in $ million)?

b) What is the total value of the company (in $ million)?

c) What is the value per share of common stock (in $)?

Operation Management, Management Studies

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