Arcadian Microarray Technologies – Case XXXXII

1. Explain the implications of case Exhibit 1. Based on that exhibit, is terminal
value a material component of firm values?
2. Drawing on Exhibit 4 and your own general knowledge, where would the
various estimators be appropriate?
Where would they be inappropriate?
3. Regarding the cash flow forecasts in case Exhibit 5, at what point in the
future would you set the forecast horizon for the three investments?
Why?
More generally, what should determine when you stop forecasting annual
cash flows and estimate a terminal value?
4. Estimate other terminal values based on alternate estimation approaches.
From these various estimates, please triangulate toward a single composite
estimate of terminal value for each of Sierra Capital and Arcadian’s
forecasts.
What is the resulting present value (PV) of cash flows under Sierra Capital
and Arcadian’s outlook?
How significant was TV in creating the difference between the two present
value estimates?
5. As a general matter in valuation work, how much attention should terminal
value garner?
What short list of questions about TV could you keep on hand in case a
client asked you to opine on a valuation of that company?
 the concept of terminal value and 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, the limiting assumptions of constant
growth to infinity, and (weighted-average cost of capital) WACC > g
 use of the Fisher formula as a foundation for estimating the growth rate to infinity
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