Running Head: GENSET 1989 1

GENSET 1989
Running Head: GENSET 1989 2

Company Overview
Genset was not a well-developed firm and Brandy was an experienced individual with the

valuable experience of working with biotech companies and he had a dream of starting his own

Biotech Company. Though he knew that company was not well developed and was unable to be

presented in front of the US venture capitalists, so he was well-aware of the fact that he had to

raise money. Raising money in France was a bit difficult because the French economy had been

growing very steadily and the unemployment rate was at its peak. The growth of biotechnology

was not increasing and it was because of the risk aversion behavior of French people.

Considering this, Brandy had to work on the capital which he wanted to raise, and now the

question was that what strategies Brandy and his partner were left with in terms of raising capital

for the company.

Operating status
Genset is an underdeveloped company and Brandy was striving hard to raise capital to

present the company in front of the US venture capitalists so that they could acquire good

investors. French people are risk aversive and they prefer not to go for entrepreneurship. Large

banks were treated as the best source of capital for firms. The company is less developed and

needs finances to develop its operations and initiate in biotechnology. Brandy had planned to

invest in the PCR technology which was used to amplify the DNA. There was an increasing

trend of studying this new technology and they found a potential business to invest in and

develop for the future. Brandy developed a business strategy to generate revenue from selling

short strands of DNA that is oligonucleotides. It had the potential of growth in the future,

alongside which the company also began to provide the services of diagnosing the disease

through diseases’ diagnostic kit. For long-term, Brandy had the plan of making investments in
Running Head: GENSET 1989 3

producing drugs that would be based on antisense technology. Brandy knew that in France and

neighboring European states; there was less direct competition for the company.

NPC
The net present value of the project is positive and increasing. The NPV is the difference

between the present value of cash inflows and outflows in a period. So, Brandy should go for this

project and continue his planning and implementation plan. Further, refer to appendix 1. The

NPV of this project is $13,439.25.

RISK-ADJUSTED NET PRESENT VALUE

The rNPV is a method used for the valuation of risky cash flows. It is calculated to

analyze the R&D projects of the company. So, Brandy should adopt the research-based projects

as it will also help the company in approaching financing. The funds for research projects are

very easy to access as compared to others, in France. The adjusted risk net present value is

$140.04. Further refer to appendix 2.

Investment Opportunities
Brandy analyzed the investment options as he noticed that in France; the low growth

economy results in less industrial investment for the companies. The company has the option to

go for research in biotechnology, because by doing so the company can take the advantage of

government funding as the government is very supportive towards research and development and

support academic and industrial relations. In an inclusion, the government also encourages

private funding in this sector of the country. Most French companies’ investments in biotech

companies is 5.4% investment in France while in Europe it is 2%. Investors have already
Running Head: GENSET 1989 4

informed Brandy that they would not wait for long-term which focuses on research and

experiencing losses in the first year. The research sectors has the potential to receive investments

and French investors are not willing to invest in the long-term planning of those companies who

are focusing on biotechnology. The companies have an opportunity to shift their focus on short-

term planning and research and development to boost their investment opportunities.

Options Payoffs at Expiration

After analyzing the payoffs at expiration; we have assumed that the strike price is 45, the

initial price is 2.3,and the underlying price is 49 in the call option. Considering this, we found

that the call option is incurring the loss of -2.3, whereas at an underlying price of 41 input option;

there is a profit of 1.7; so we can state that the put option is favorable for Brandy. Further refer

to appendix 3.

The Binomial Option Pricing Model

In the binomial pricing model, we have analyzed the European call option as well as its

up factor and down factor. In appendix 4, we assumed the strike price as 45 and the stock price

as 40, time to maturity as 2, the risk-free rate as 5%, volatility as 21%, and the number of steps

as 2. So based on these assumptions; we found that the up factor is 1.23, the down factor is 0.81,

Dt is 1, and the risk-neutral probability is 0.3942. So in the European call option, the present

value of the stock is 5.954387317 in the case of up factor and it is 0 in the case of down factor.

Recommendation
After the analysis, we have come to the conclusion of suggesting Brandy to accept the

project and work on short-term goals and research and development projects. After this, the

company should not invest heavily on long-term projects, because for now, the company should

just work on acquiring the trust of the investors. After successfully managing the operations; the
Running Head: GENSET 1989 5

company should proceed to drive its focus on long-term business strategies. The NPV is positive

and increasing, which is a good indication of investing in these projects. In an addition to that,

the company should also consider winning the investors' trust.

Appendices

Appendix: 1 NPC

NPV CALCULATION
  1989 1990 1991 1992 1993
Free Cash Flows -7900.34 -2200.85 2906.65 4323.19 494.81
Terminal Value 0 0 0 0 16353.92
Net FCF -7900.34 -2200.85 2906.65 4323.19 16848.74
NPV $13,439.25 0 0 0 0

Appendix: 2 RISK-ADJUSTED NET PRESENT VALUE

Formula  
rNPV PV of all cash flows- initial investments
rNPV $140.04

Appendix: 3 Options Payoffs at Expiration

Call option  
  Strike price 45  
  Initial price 2.3  
Running Head: GENSET 1989 6

  Underlayig price 49  
  Profit or loss   -2.3 Loss

Put option  
  Strike price 45  
  Initial price 2.3  
  Underlayig price 41  
  Profit or loss   1.7 Profit

Appendix: 4 the Binomial Option Pricing Model

0 1 2
60.87846
49.34712
40 40
32.42337
26.28187

European call option

0 1 2
15.87846
5.954387
2.232882 0
0
0
Up Factor   1.23
Down factor   0.81

Dt   1

Risk neutral probablity p 0.3942

1-p   0.6058