Case Study 2: Rocky Mountain Advanced Genome

This paper provides an objective valuation of Rocky Mountain Advanced Genome (RMAG) to be adopted by Big Sur regarding the purchase of a 90% equity stake for $46 million.

Forecast Horizon: The forecast horizon was lengthened to 15 years, as RMAG is a young, “highly promising, high risk” firm, only established 15 months prior, it should reach maturity in 2010 as sales, expenses and free cash flows stabilise (Fig.1). RMAG exhibits characteristics of a high growth firm with no dividends, high risk, high CAPEX expenditures and no leverage. Furthermore, it would be inadequate to adopt the forecast horizon dictated by RMAG and Big Sur of 10 years as cash flows only breakeven in Year 8 (Fig.2).
2011). As non-cash working capital is a prerequisite to sales (Strischek 2003), this model bases changes in working capital as a proportion of sales revenues in the most recent year, at 3%. Whilst CAPEX is not necessarily sales driven, in the absence of further information regarding assets it is prudent to assume it is a factor of sales, hence CAPEX/Sales is fixed at 5% whilst absolute levels of CAPEX grow reflecting inflationary effects of maintenance. Non-cash items which represents depreciation and amortization is forecast at 4.5% annually, as the firm matures depreciation and capital expenditures converge, as CAPEX tends to account for replacement of depreciating assets. The applicable tax rate was deduced as the statutory combined federal and state tax in Colorado of 38% (Tax Foundation 2011). This figure is corroborated by the average effective tax rate of 35%. Hence, these underlying assumptions and resulting NPAT, are apparent in the pro forma statement (Fig.2).

FCF Projection: The discounted cash flow (DCF) valuation utilised a Weighted Average Cost of Capital (WACC) of 20%, as it was the consensus figure by RMAG and Big Sur as it was “low for a typical venture capital investment, but given that RMAG’s R&D partners are bearing so much of the technical risk in this venture, it’s justified”. FCF break-even in Year 8 (Fig.2), with the