Assignment
The owner of a privately held medical pharmaceutical company whose name is AMA and has a successful past coming up with medical solutions to current challenges regarding severe diseases. Recently they decided to develop a COVID-19 vaccine that will be 98% effective and can be ready in the next 180 days. Prior to the need for the vaccine, AMA has been using R&D to be prepared in case of a pandemic occurring in the world. The FDA knows the company well and feels they have the capability to make this happen based on its history.
There is a lot of excitement for the company since revenues have dropped this past year and their earnings have flattened out. The owner feels this is the breakthrough they have been waiting for. Some major financial decisions need to be made to make this happen and become a reality. As the CFO of the company, you are tasked to do an analysis of the financial situation and present to the board some recommended financial steps for the company to finance this new project.
A. You have access to a significant supplier in the industry who can develop this vaccine, saving some initial investment costs. However, you are thinking about making the vaccine rather than buying the vaccine. Make an argument for MAKE versus BUY when starting out on a major investment decision. Choose what you would do (make or buy) and then explain.
B. The next step is financing the company. Since revenues and earnings have not been strong in the past year, you are considering financing the company. You can secure debt with a lender who has been supportive of the company and this new idea or you can become a publicly held company to raise new equity to fund the project. What decision would you make? Would you secure more debt or offer an IPO? Please explain your decision.
C. If you choose to secure debt, what criteria must you consider in this decision as a financial manager?
D. If you go public an investment amount is needed. How do you determine this? How do you determine market capitalization in your decision?
E. Now that you have the money either through debt or equity the next step is to forecast the company for the next 5 years for your investors. What are the key assumptions you will use to develop a 5-year proforma? Please list your assumptions and what you need to consider when you develop these assumptions.
F. You will want to calculate the ROCE (return on employed capital). This is an important measurement of success with this new project. As a CFO how does this work and why is it important to you? What type of ROCE would you like to see?
G. Obviously, you want to make money, so you must determine cost versus price. Determining the price is critical to your forecast. How will you determine your price? Also, how will you calculate your profit margin and markup? Why is this important?
H. After working through these questions for analysis what are the key criteria for a financial manager to consider when making decisions?