Arcadian Microarray Technologies, Inc Case Solution

PD2

Terminal value is the amount that represents the value of the asset/bond at the point of its termination at the future date when the asset will be terminated. Different assets can be evaluated by using different estimators of terminal values. As the market conditions do not remain the same for every asset, hence single estimator is not enough to evaluate the different types of assets. Each estimator uses its own base to calculate the terminal value for an asset. Hence each estimator is good for specific conditions, like the book value of an asset can be used to estimate the terminal value of the assets at the date of its termination. Book value can be used when there is no proper market for the asset, under consideration, and hence it becomes difficult to estimate the actual fair value of that asset. The book value of an asset can’t be used to evaluate the terminal value when the fair value is easily approachable. Fair value can be defined as the amount which the seller would get on hand by selling the asset in the market. A book value estimator ignores the market conditions while calculating terminal value. Hence, it can’t be used for evaluating an ongoing asset which has an indefinite life. But it can be used to evaluate the terminal value of the asset which is expected to be sold in a period of a year or two. Liquidation value can also be used to estimate the terminal value of an asset when the asset is held for sale and the sale is expected to be probable within a year. But liquidation value can’t be used to estimate terminal value when the asset is expected to be used over the course of many years. It does not take into account the benefits associated with the use of the asset over the years. Moreover, replacement value can be used to estimate the terminal value when there is an active market for assets that are to be replaced and the assets have a definite life, whereas if the assets are having an indefinite life than replacement value would not appropriate to estimate terminal value. Similarly, the use of Earnings capitalization multiples would be appropriate to estimate the terminal value when a company or the bond is having a constant growth of its assets and earnings. As if the earnings or the book values of the assets, fluctuated abnormally over the recent year due to unforeseen conditions, earnings capitalization multiples would not be the good estimators of the terminal values. Furthermore discounted cash flows are the most appropriate estimator of terminal value for the majority of assets. As the discounted value of future cash flows would truly reflect the terminal value of the asset if the asset is generating cash which is growing constantly over the year. But if there is no cash related to the asset, discounted cash flow method would not be appropriate to estimate the terminal value.

PD3

The cash flows in the future attributed to a particular asset, are determined based on the data for the recent past year. The annual cash flows are forecasted by using growth rate which is calculated from the past data. In recent years, there may be some unexpected circumstances that boosted the company's performance or reasoned to perform it badly. Such conditions are not expected to be the same in the future; hence we can’t consider the cash flows to be the same over the years. We use a fairly calculated growth rate to forecast the future cash flows, and discount them to get the present value of the asset. But the assets having the indefinite life may have indefinite cash flows which are not easy to discount.