Course Assignment Date Harvard Case Solution & Analysis

Course Assignment Date Case Study Help

(10 points) Estimate beta of the LAB Research using comparable.

The comparable beta is 1.3 which is used to calculate the geared beta of the Lab research division by using Debt/ Equity ratio of the Lab research division is 1.01(Levered Beta of Lab Research Division)

(5 points) Estimate cost of equity of LAB Research. Note that final estimate of cost of equity should incorporate small stock premium. That is, the final Ke=Rf+beta*(market premium) + small stock premium.

The Cost of equity with an additional small stock premium is 6.75500%. The incorporate small stock premium was 1.5%, which was added in the cost of equity.

(5 points) Estimate WACC of LAB Research.

The WACC is calculated by the formula, which is

(5 points) Can DCF valuation be applied? Why of why not? This is a conceptual question.

The DCF valuation method is not applied in this case because of the increase in uncertainty. The uncertainty has led todifficultly in forecasting the future cash flows,which would cause shift in thetimings with any degree of confidence. It is also difficult to analyze the suitable discount rate due to high certainty.

The main function of the DCF is to evaluate discount rate in order to analyze the future cash flows. In thiscase using DCF in high uncertaintywith high discount rate about 15 to 25% will terminate the perceived value. Due to this, many opportunities will be hidden behind this negative value.

(5 points) First you need to choose among four provided categories a category that in your view closest to Lab Pharma. Please provide your argumentation for choosing that category.

The category is chosen for LAB Pharma’slead product in Phase II trial or below. The reason for choosing the category is thatLAB Pharma is currently in its developing stage.

While all the other data consist the categories of developed products,theLAB Pharma hasits lead product at thestage of trial, which iswhy the most appropriate category is the third category of phase II trial.

(10 points) Based on the enterprise value of a comparable group chosen above, estimate the market value of Lab Pharma’s equity.

Enterprise Value (EV) = Market Cap + Debt - Cash
The Canadian$/US$ exchange rate as at March 3, 2006 was 1.13450
enterprise value 80740.4143
market debt 43,338
Cash 16,914
value of equity 54,316

The value of equity is calculated as CA $ 54,316,000.

(5 points). Based on your assessment of Market value of equity of LAB research in (7) and market value of equity of Lab Pharma in (8.b.ii) what is your estimate of the discount placed on LAB International by the market?

The discount rate is the rate of return that the investors expect while investing in the company. This discount rate is used in different valuation methods. The discount rate used on the LAB International by the market is different in both the divisions. The difference is due to the nature of the divisions. The WACC is used as a discount rate in the LAB Research and the minimum cost of capital isassociated with LAB Pharma...........................


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