10. As CEO of firm A, you and your management team face the decision of whether...

10. As CEO of firm A, you and your management team face the decision of whether to undertake a $200 million R&D effort to create a new mega-medicine. Your research scientists estimate that there is a 40 percent chance of successfully creating the drug. Success means securing a worldwide patent worth $550 million (implying a net profit of $350 million). However, firm B (your main rival) has just announced that it is spending $150 million to pursue development of the same medicine (by a scientific method completely independent of yours). You judge that B’s chance of success is 30 percent. Furthermore, if both firms are successful, they will split equally the available worldwide profits ($275 million each) based on separate patents.

a. Given its vast financial resources, firm A is risk neutral. Should it undertake the $200 million R&D effort? (Use a decision tree to justify your answer.)

b. Now suppose that it is feasible for firm A to delay its R&D decision until after the result of B’s R&D effort (success or failure) is known. Is it advantageous for firm A to wait and claim this “second move”? (Use a decision tree to justify your answer.)

c. Instead, suppose that the two firms can form a joint venture to pursue either or both of their R&D programs. What is the expected profit of simultaneously pursuing both programs? Hint: Be sure to compute the probability that both efforts fail (in which case the firms’ combined loss is 200 + 150 = $350 million). Could the joint venture profitably pursue a single program?

Expert Solution

:: Solution ::

Thank you...

Rahul Sunny answered 2 years ago

Once again, your team is the key financial management team for your company. The company’s CEO...

Once again, your team is the key financial management team for your company. The company’s CEO is now looking to expand its operations by investing in new property, plant, and equipment. In order to effectively evaluate the project’s effectiveness, you have been asked to determine the firm’s weighted average cost of capital. To determine the cost of capital, here is what you have been asked to do. 1. Go to Yahoo Finance (http://finance.yahoo.com) and capture the income statement information for...

1) Your CEO has asked you to evaluate whether the firm should launch a new product....

1) Your CEO has asked you to evaluate whether the firm should launch a new product. Information provided by the consultant is as follows: $20,000 has been spent on doing a market survey, and this cost has been incurred regardless of whether the project is done or not Initial investment: $120,000 composed of $50,000 for the plant and $70,000 net working capital (NWC) Profits of $32,000 every year for 3 years after which the project ends and NWC is recovered;...

If you were the Human Resources manager and wanted to convince the CEO/management team to implement...

If you were the Human Resources manager and wanted to convince the CEO/management team to implement a flextime policy (e.g., can work any 8 hours between 6 am and 6 pm) to assist employees with children (elderly parents, others) to care for, what would you say/do? You should present your post from the viewpoint of your role as the HR manager, a senior and experienced leader, to the CEO and his/her management team. It should be a comprehensive discussion or...

what are the benefits of building management team? What is your plan for a management team?...

what are the benefits of building management team? What is your plan for a management team? Explain

If your company makes a particular decision in the face of uncertainty, you estimate that it...

If your company makes a particular decision in the face of uncertainty, you estimate that it will either gain $10,000, gain $1000, or lose $5000, with probabilities 0.40, 0.30, and 0.30, respectively. You (correctly) calculate the EMV as $2800. However, you distrust the use of this EMV for decision-making purposes. After all, you reason that you will never receive $2800, you will receive $10,000, $1000, or lose $5000." suppose you have the option of receiving a check for $2700 instead...

You are an auditor at a public accounting firm. You and your team are entrusted by...

You are an auditor at a public accounting firm. You and your team are entrusted by Partner to handle clients engaged in the home appliance retail business. Your client is a company that has go public. The client's financial statement in the previous year reported a loss, however this year reported a material gain. After you check, it turns out that the client reports income that is not much different from the previous year, however, there can be a profit...

You are a CEO at a finance firm. One of your managers is up for promotion....

You are a CEO at a finance firm. One of your managers is up for promotion. You want to make sure that they can discern a good financial offer from a bad one so that they will do well making the company money. You invent an investment proposal and give all the information to the manager in question. You tell them to assess whether or not the company should accept the investment proposal or not. (Your proposal can be good...

As the CEO of Gelta Airlines, your compensation is tied to the performance of firm. You...

As the CEO of Gelta Airlines, your compensation is tied to the performance of firm. You know that fuel price has a significant impact on the performance of the firm. To avoid operating losses from high fuel prices, you are considering 100 call contracts (1 contract = 100 call options) with exercise price of $30/barrel. Its price is either $25 or $50 at the end of the year. The risk-free rate is 10% and the current market price of the...

You are the CEO of a firm with five distinct SBU/LOBs. It is your responsibility to...

You are the CEO of a firm with five distinct SBU/LOBs. It is your responsibility to decide how to manage them. Develop a model using the following intelligence, and then briefly comment on what you would do with each SBU/LOB. The GNP is growing at 8%. SBU/LOB A. This is your newest product line and it was just introduced. You anticipate significant competition from the bigger existing competitors but there is still plenty of room to grow in the industry,...

You and your management team are working to develop the strategic direction of your company for...

You and your management team are working to develop the strategic direction of your company for the next three years. One issue you are discussing is how to finance the projected increases in operating assets. Your options are to rely more heavily on operating creditors, borrow the funds, or to sell additional stock in your company. Discuss the pros and cons of each source of financing.

Question