Lab International Inc. Harvard Case Solution & Analysis

Lab International Inc. Case Solution

Alternative d: spinoff the lab research


As hybrid company is what investors spinoff look as favorable for increasing the share price of lab international. If company will spin off lab research; it will be valued independently, and each division would work independently without destroying each other’s value. As Lab Research generates strong cash flows; it can run its own operation without raising funds.


As Lab Research generates strong cash flows that benefits Reiter and creates synergy, but after spinoff these benefits will be lost.

Alternative e:spinoff the lab pharma


Spinoff of Lab Pharma and Reiter will enable the management to drive its entire focus on its expected milestones, which will increase the value of this division ultimately.


Lab pharma will need cash, as the shortage of cash will force the company to go off market.

Alternative f: dividend spinoff the lab research or lab pharma


If the company spinoffs the stock dividend; each division will be priced separately and automatically by the market, so there wouldn’t be any valuation issue.


Ignoring the potential valuation issue will not result in any financing to lab.

Question No: 6

The market price of the share is calculated by using the relative valuation analysis, which is CA $3.33. Given below in the appendix1; IPO price estimate.


By using three market multiples, such as: EV/Sales, EV/EBITDA and P/E multiples’ following equity values are calculated, which range from 42,230 to 60,632.Refer to appendix 2.


Using the growing perpetuity approach; terminal value of cash flowsis calculated as $135,139,281. Calculation is done by using growth rate of 4% and cost of capital of 10.21%.

For getting WACC; we have initially calculated cost of equity.We assumed market beta 1 as an unlevered beta, and average comparable debt and equity weight ages to calculate the average unlevered beta. By using that unlevered beta; weight of debt and equity (based on assumed market value of equity and debt) and given tax rate 32%; we have calculated the levered beta of Lab Research International, which is 1.3.The risk free rate for the company should be default Government zero coupon.

The Government bonds can be associated with the duration of the cash flows used by the company. The data used in this is of 10 years;therefore five years’ time period should be taken, which is 4.26%.

The risk premium is a critical component in the portfolio of any company. The risk premium is widely used in the company’s corporate finance and valuation. The company is small sized, which evaluates its risk premium to increase by 1.50%. By adding the market risk premium of 5%, the new market premium is 6.50%. The after-tax rate of debt is 7.754%, as given in the question. On the basis of these values the cost of capital is 10.21%. The calculation is given in excel sheet named WACC.

So the estimate enterprise and equity value of Lab Research by using DCF approach is given below in appendix 3:

  1. c. As the WACC and growth rate increases, the equity value decreases. As shown below in the tableSummary - Sensitivity Analysis’ given below in appendix 4.
  2. d. On the basis of expected values in question 6 a, b, and c;the final equity value will be in the range from $42,230,000 to $60,632,000.

Question No: 7

The market price of the share is calculated by using the relative valuation analysis, which is CA.

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

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

b.The category is chosen for LAB Pharma’s lead product in Phase II trial or below. The reason for choosing this category is that LAB Pharma is currently in its developing stage.

While all the other data consists of the categories of developed products;the LAB Pharma has its lead product at the stage of trial, which is why the most appropriate category is the third category of phase II trial. Based on the enterprise value of a comparable group chosen above; estimate the market value of Lab Pharma’s equity.The table is given below in appendix 5............................

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