Assignment Task:

Business Case – Financing and Investment Decision Analysis

A Promising Start:

In the summer of 2017, Photonics, a leader in the production of biometric sensors, started to experience a decline in sales growth for one of their most popular products, OxyAlert.  OxyAlert was launched in 2014 and quickly became the industry standard in analyzing the oxygen levels of surgically repaired tissue after emergency care procedures. In the first year of sales this product captured 25% of the market in post operation biometric devices.  By the second year it had rapidly overtaken the industry leader with a 55% share of the market. The success of this product was primarily due to innovative features that were not found on any other product. Features such as wireless disposable sensor probes and advance analytic software allowed doctors to shorten the recovery time of their patients in ICU units, which decreased per patient ICU expense by 10%.  Based on these innovative features Photonics was able to charge a premium for this product and establish themselves as one of the most profitable companies in the industry.

Several competitors have now closed the gap in product design and functionality.  In the spring of 2017, SeaBridge, one of Photonics biggest rivals, launched the product TotalDiagnostic.  This product contains similar disposable sensory technology as OxyAlert, however, it allows doctors to analyze a broader range of a patient’s biometrics.   While this product was priced around 10% higher than OxyAlert, doctors had the added advantage of not only maintaining the same recovery rates but also decrease the rate of post surgical infection by 15%.  By the early part of 2018, TotalDiagnostic had captured 30% of the market.  

Photonics response was swift.  They immediately reduced the price of OxyAlert by 20% in order to regain market share.  From March through May, sales of OxyAlert rebounded. While profit margins of the company did take a hit, it appeared that the price reduction stabilized the company’s market share.  Unfortunately, recent sales reports from November show that pre-orders for OxyAlert are slightly down.  

From Research to Commercialization:

Photonics was founded in 2011 by Rachel Walker, a professor of Bioengineering.  From 2004 through 2009, Dr. Walker authored several papers on photonic measuring systems and it’s applications in biometrics.   By 2010 she developed a prototype sensor that that was extremely non-invasive to the patient. She realized that this type of sensor combined with advanced computer algorithms could quickly analyze oxygen levels in surgically repaired tissues giving doctors “real time” information on the likelihood that a patient’s body would accept or reject the repaired tissue.       

Dr. Walker believed that she had an important technology that could be highly profitable if she could find a way to commercialize it.  Given the uniqueness of this technology she was able to obtain a patent in 2011. She felt fairly confident that her technology would be a major improvement in post-surgical care.   However, several obstacles existed. The cost to turn this technology into a commercialized product was fairly substantial. However, more importantly, this was a highly disrupted technology that would require hospitals to change ICU and post operation processes.  She wasn’t even sure if hospitals had a desire to change their current practices.

After interviewing several prominent hospital administrators, she concluded that that demand would be high if she could find a way to mass-produce her prototype at a cost that was on par with biometric sensors currently being sold to hospitals and other surgical centers.  After several investor presentations, she was able to attract significant funding from a venture capital firm that specialized in funding small biomedical start-ups. With a $15 million dollar investment, Photonics was able to launch its first product, The BMD 1000, in January 2013.     

In the first three months of 2013, sales of the BMD 1000 were tepid at best.  While the product design was innovative, it did not integrate well with the current technology employed by most hospitals.  Based on the criticisms of this product, Dr. Walker and her engineering team went back to the drawing board. The redesigned product was named OxyAlert and was introduced to the industry with much fanfare in January of 2014.  By July of 2014, Photonics had secured orders with several large health care facilities on the East Coast. One year later, OxyAlert become the standard in the biometrics device industry.

Business Case Analysis #1: “Reinventing the Business – Market Expansion”. 

Directions: in 1 to 1.5 pages single space 12-point font answer the following 5 questions.  For questions 4 and 5 provide a separate excel file with the supporting quantitative analysis.  This assignment is due end of day Friday Week 4:

Q1: Based on the stage of growth that you believe this company to be in what type of financing can this company expect to obtain?  Make sure to clearly identify the stage of growth that you think the company is in and support your analysis with examples from the business case.  In your answer elaborate on the different types of financing options for short-term working capital needs and long-term capital assets.  

Q2:  Based on Photonics’ competitive environment and business model what are the pros and cons of this firm issuing either debt or equity?  Please integrate course theory from the readings and lectures and provide specific examples from the business case to support your answer.

Q3.  In your opinion, if you were a shareholder, what method would you use to value the impact of the “Aggressive Expansion” over the “Slow Expansion”? Describe how you would value each of these two options and the metrics that you would use.

Q4.  Based on your answer from question 3, complete your analysis using the projections from exhibit 1 (Excel file) and determine which option provides the greater value to the shareholders over the 5-year period.  Assume that shareholders expect a 20% required return on their investments.

Q5.  After year 5 assume that growth in net income and cash flow will continue at 4% until perpetuity.  Based on this assumption which option provides the greater value to shareholders?

Business Case Analysis #2:  “Reinventing the Business – New Product Development”

Directions: in 1 to 1.5 pages single space 12-point font answer the following 3 questions.  Provide a separate excel file with the supporting quantitative analysis. This assignment is due end of day Friday of Week 9:

Q1.  Using the balance sheet from exhibit 2 and assuming that Photonics’ cost of raising debt is 6% and the its’ cost of raising equity is 23% what is the company’s weighted average cost of capital?

Q2.  Assuming that Photonics’ has unlimited funding, which products should Photonics launch? Support your recommendation by providing analysis on each product’s projected cash flow over a 5-year period and the overall economic value that each product launch provides. You will need to integrate the principles of capital budgeting decision-making in your analysis.  

Q3.  Based on your analysis from question 2 which product or products would you recommend Photonics launch if Photonics has access to only $80 million dollars of funding to support capital equipment purchases and one-time marketing expenses?  Assume that initial inventory purchases (Cost of Goods Sold), overhead expenses, and other capital working capital requirements will be funded through internally generated cash derived from operating profits.

 

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  • Posted on : June 18th, 2019

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