Silicon Valley Medical Technologies Case Study

Essay by bryan3182University, Bachelor'sA+, June 2009

download word file, 10 pages 3.0

EXECUTIVE SUMMARYSilicon Valley Medical Technologies (SIVMED) was founded as a research and development firm. In the beginning, SIVMED performed its own basic research, obtained patents on promising technologies, and then either sold or licensed the technologies to other firms which marketed the products. The firm has since then grown and is now contracted to perform research and testing for larger genetic engineering firms, biotechnology firms, the US government, and is now widely recognized as the leader in an emerging growth industry. SIVMED's founders were relatively wealthy individuals when they started company, and they committed a great deal of their own funds to the venture. Their personal funds, however, were soon exhausted by the extreme and rapid growth of the company. This caused them to have to raise capital from outside resources. The borrowed heavily for a few years until all funds were used. They then turned their sights to issuing both preferred and common equity.

SIVMED is organized into 2 divisions: the Clinical Research Division and the Genetic Engineering Division. The two divisions are both located in the same buildings, but the equipment they use and their personnel are quite different. In recent years, competition in this market has become stiffer and other large biotechnology firms have begun to recognize the opportunities in SIVMED's research lines. This increased competition has forced the board of directors at SIVMED to upgrade their resources and apply state-of-the-art techniques in its managerial processes as well as in its technological processes. The financial vice president has developed an estimate for the firms cost of capital to use in capital budgeting decisions. He has requested that this cost of capital estimate and analysis be completed for the next board of directors meeting.

Section 1 of this report discusses and analyzes the firms cost of capital. It...