Finc

To set an appropriate FH for RMAG we need to carefully examine the industry which it operates and how they evolve. Looking at Human Genome Sciences, Inc we can deduce sales growth tend to be explosive when discoveries are made in human gene decoding (e.g. sales grew from zero to $76.5 m in just over three years). Therefore it is reasonable to assume high sales growth in early part of the RMAG’s life cycle although from a very low base (e.g. from $5 m to $40 m in 4 years) given RMAG had already decoded 60% of human gene to design treatment for diseases.

While the company's revenue growth will stay strong in the first few years, it could slow to a lower rate by Year 12 as a result of slowdown on commercialization of new product by FDA and patent on some treatment expiring paving a way for higher competition. Forecast Horizon (FH) for RMAG by Big Sur does not show stabilization is sales in 2006 (sales growth at 13%) which suggest the company is still growing. Therefore the FH has been moved to 2015 where sales are expected to be stable (approximately 4% growth thereafter). FH of 2015 is suitable given expense and FCFF also start to stabilize at his point. The FH of 2015 also reinforces the fact that takes around 15 years to take drugs from lab to the drugstore.

Free cash flow are calculate by looking at what's left over from revenues after deducting operating costs, taxes, net investment and the working capital requirements and adding  non cash items (assumed to be depreciation and amortization) since they do not change the free cash flow. The flowing table provided all assumptions made when calculating FCFF.

Future Operating Costs | Will continue to rise but will fall dramatically as a percentage of sales because of very high sales growth. The rise is associated to the variable cost incorporate in achieving higher sales |

COGS | Will follow upward trend with sales but to a lesser degree because RMAG is expected to get cost efficient |

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