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COURSE

CORPORATE FINANCE

LECTUR

PROFESSOR KWANGWOO PARK

ER

CASE ANALYSIS
AQUA BOUNTY
(Product Number: 213047-PDF-ENG)

TEAM MEMBERS

ABRAHAM A. MENSAH
20134725
STEPHEN MAGARA
20134777
STEVEN BAMEKA
20134778
WINNIE KABATESI
20134788

NOVEMBER 12, 2014

Aqua Bounty Case Questions


Q.1. (1) briefly discuss the reasons why Aqua Bounty chooses to come to
IPO now,
Raising the substantial amount of capital required to fund additional
investment and also continue the development and commercialization of
the firms key product lines.
Success of the laboratory and field trials left Aqua Bountys management
confident that they would be able to attract equity capital hence going
Public.
(1)Why list on London AIM?
The European market was much more familiar with the aquaculture industry,
and the British Investment bank Nomura was confident that Aqua Bounty
would be able to attract the investment it required.
Aqua Bounty was a relatively small-cap company hence being eligible to list
on Londons Alternative Investment Market (AIM), which did not require a
minimum market capitalization or number shares placed.
Regulatory requirements for listing on Londons AIM were less onerous than
those of other markets. Listing on the AIM required only compliance with the
lighter-touch Financial Services Authority regulations compared to US-listed
public companies which faced strict requirements on financial reporting and
corporate governance following the passing of Sarbanes-Oxley Act in July
2002.These were particularly problematic for smaller companies such as
Aqua Bounty, for which the costs of compliance could be significant.
One final attraction to AIM was a perception that market appetite for
agriculturally-oriented biotech IPOs was high as evidenced by recent
successful offerings such as that of Devgen.
Q.2. (1) what are the main risks facing the business?

Aqua Bounty had not yet received regulatory approval from FDA
Environmental Campaigners opposed the concept of GM products
Long and uncertain route to the market for its modified fin-fish products
Consumers were particularly not receptive to genetically modified fish, even
if they were shown to be safe for human consumption
Discuss the valuation of a start-up business like Aqua Bounty is
conventionally difficult.

Enormous uncertainty around the companys future revenues, driven by the


degree of regulatory uncertainty surrounding its AquaAdvantage products,
along with the unpredictability of the products route to market.
Unique nature of Aqua Bountys operations, the firm suffered from dearth of
comparable companies. For example only one firm operating in somewhat
similar fields -Devgen, a Belgian agricultural biotech firm which had the
developed pioneering genetically modified agricultural products, and recently
listed on the Euronext.

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Q.3. (1) What would a standard DCF approach look like? [Assume 14%
discount rate and 35% corporate tax rate]
BASELINE
SCENARIO

200
6

Revenue

COGS

20
07

2008

2009

201
0

201
1

201
2

201
3

201
4

201
5

201
6

201
7

2018

1.30

5.80

13.0
0

24.5
0

37.7
0

51.3
0

63.5
0

65.4
0

67.4
0

69.4
0

71.5
0

0.30

1.20

2.60

4.90

7.50

10.3
0

12.7
0

13.1
0

13.5
0

13.9
0

14.3
0

SG&A
Product
Commercializat
ion

4.10

4.30

4.70

5.20

5.90

6.60

7.20

7.40

7.60

7.80

8.10

12.00

18.00

15.0
0

EBIT

(15.1
0)

(17.7
0)

(9.3
0)

14.4
0

24.3
0

34.4
0

43.6
0

44.9
0

46.3
0

47.7
0

49.1
0

Income
Tax@35%

8.51

12.0
4

15.2
6

15.7
2

16.2
1

16.7
0

17.1
9

Annual Cash
Flow

(15.1
0)

(17.7
0)

(9.3
0)

14.4
0

15.8
0

22.3
6

28.3
4

29.1
9

30.1
0

31.0
1

31.9
2

Discount factor

1.14

1.3
0

1.48

1.69

1.93

2.19

2.50

2.85

3.25

3.71

4.23

4.82

5.49

PV

(10.1
9)

(10.4
8)

(4.8
3)

6.56

6.31

7.84

8.71

7.87

7.12

6.44

5.81

Sum

31.1
6
298.
84

Terminal Value
PV Terminal
Value

54.4
1

Net Present
Value

85.
57

What are the problems with this?

Estimating the series of operating cash flows projections.


Assumptions of the growth rate
Assumptions of the discount factor

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Q.4 (2) What does the probability decision tree look like? What
valuation do we reach? [Assuming FDA approval with 1/3 chance is
forthcoming, Aqua Bounty further assumes that there is an equal chance of
each of the three commercialization scenarios occurring. Under the low
scenario, revenues would be 75% lower than under baseline ; under the
high scenario, revenues would be 75% higher than under baseline. In all
three scenarios, COGS will be 20% of revenues, and annual SG&A costs of
4million pounds plus 5% of revenues will be incurred. Commercialization
costs would be the same in all three scenarios, as shown in Exhibit 6.]
Low Scenario

Approved

Baseline

AquaAdvanta
ge Request
for FDA
Approval

High
Scenario

Not
Approved
$0

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Q.5 (Bonus Points 2) what will be the value of the commercialized


project for Aqua Bounty if you apply Black-Scholes model? How this
will affect your decision compared to the conclusion from the
decision tree?
Input Data

Stock Price now (P)


Exercise Price of Option (EX)
Number of periods to Exercise in years (t)
Compounded Risk-Free Interest Rate (rf)
Standard Deviation (annualized

10.89
8.35
3
4.22%
0.42%

Output Data

Present Value of Exercise Price (PV(EX))


*t^.5
d1
d2
Delta N(d1) Normal Cumulative Density Function
Bank Loan

N(d2)*PV(EX)

Value of Call

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7.3571
0.0073
53.9149
53.9076
1.0000
7.3571
3.5329