This spreadsheet was prepared by Kenneth M. Eades, Professor of Business Administration.

Copyright © 2014 by the University of Virgin

Charlottesville, VA. All rights reserved. For customer service inquiries, send an e-mail tosales@dardenbusinesspublishing.com. No pa
reproduced, stored in a retrieval system, posted to the Internet, or transmitted in any form or by any means—electronic, mechanical
otherwise—without the permission of the Darden School Foundation.

Rev. Jun. 6, 2016

 This spreadsheet supports STUDENT analysis of the case “Centennial Pharmaceutical Corporation”
(UVA-F-1446).

as prepared by Kenneth M. Eades, Professor of Business Administration. Copyright © 2014 by the University of Virginia Darden School Foundation,
A. All rights reserved. For customer service inquiries, send an e-mail tosales@dardenbusinesspublishing.com. No part of this publication may be
in a retrieval system, posted to the Internet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or
the permission of the Darden School Foundation.
6. As a CloneTech manager, would you vote to accept the revised EP as a “good-faith adjustment” to the original EP?

No, not in my control new co

Sinergies may no realize
Cannibalization
 $0.00
$0.00

original EP? Present a brief list of the reasons for your decision.
1. With three years left on the original EP, what would you estimate as the present value of the future bonus
the 100% level for each bonus payment is expected to be paid each year for the remaining three years of the
Also assume that earnings for year 2 are high enough to invoke the MBS, and use the 3-year government rat

Y1 Y2 Y3 Y4
Bonus $2.00 $2.00 $2.00
MBS $2.00
Bonus paid $0.00 $4.00 $2.00 $2.00 $8.00 Total bonus
Eurozone Aaa Government Yields
3-year 0.47%

NPV $7.93

2. What would you estimate as the present value of the future payments under the revised EP? Again, you sh
flows and assume that earnings will exceed the 100% target level for each year. How does this number comp

Sales 7 62.00 74.40 89.28

Cummulative 62.00 136.40 225.68
Y1 Y2 Y3 Y4
Bonus $1.33 $1.33 $1.33
MBS
Fix bonus $1.00 $1.00 $2.00
Bonus paid $0.00 $2.33 $2.33 $3.33 $7.99 Total bonus
Eurozone Aaa Government Yields
3-year 0.47%

NPV $7.91

3 How would your answer to question 1 change if the MBS effect occurred in year 4 rather than year 2?
Y1 Y2 Y3 Y4
Bonus $2.00 $2.00 $2.00
MBS $2.00
Bonus paid $0.00 $2.00 $2.00 $4.00 $8.00 Total bonus
Eurozone Aaa Government Yields
3-year 0.47%

NPV $7.92

4. Should the guaranteed cash flows be discounted at the same rate as the bonus payments? What discount
recommend for the guaranteed payments? What discount rate would you recommend for the bonus paymen

CPC has a rating of A, so a 1.58% rate will be fair for secure money part of bonus
Bonus at corporate Baa 2.33%

5. How would your present-value calculations change for questions 1 and 2 if you used a 5.58% discount rat
rate for the guaranteed payments? What arguments can you make to justify using two different discount rate
Old EP Y1 Y2 Y3 Y4
Bonus $2.00 $2.00 $2.00
MBS $2.00
Bonus paid $0.00 $4.00 $2.00 $2.00 $8.00 Total bonus
HR 5.58%
NPV $7.28

Revised EP
Y1 Y2 Y3 Y4
Bonus $1.33 $1.33 $1.33 *Esto esta mal, por q es
Fix bonus $1.00 $1.00 $2.00 DCF debes usar expecte
Bonus paid $0.00 $2.33 $2.33 $3.33 $7.99 Total bonus
Bonus HR 5.58% $3.58
Secure HR 1.58% $3.86
NPV $7.44

6. As a CloneTech manager, would you vote to accept the revised EP as a “good-faith adjustment” to the ori

No, not in my control new co You should disccount at diferente rates the differente cash flow dependind on th
Sinergies may no realize
Cannibalization

Probability Adjusted (50%) Cash Flows Discounted at Risk-Adjusted Rates (€ millions

Old EP Y1 Y2 Y3 Y4
Bonus $1.00 $1.00 $1.00
MBS $1.00
Bonus paid $0.00 $2.00 $1.00 $1.00 $4.00 Total bonus
HR 5.58%
NPV $3.64

Revised EP
Y1 Y2 Y3 Y4
Bonus $0.67 $0.67 $0.67
Fix bonus $1.00 $1.00 $2.00
Bonus paid $0.00 $1.67 $1.67 $2.67 $5.995 Total bonus
Bonus HR 5.58% $1.79
Secure HR 1.58% $3.86
NPV $5.65
alue of the future bonus payments? Assume that
aining three years of the EP (years 2, 3, and 4).
he 3-year government rate as the discount rate.

evised EP? Again, you should use the 3-year government rate for all the cash
w does this number compare with your estimate from question 1?

rather than year 2?

ayments? What discount rate would you

nd for the bonus payments?

sed a 5.58% discount rate for the bonus payments and a1.58% discount
wo different discount rates?
 *Esto esta mal, por q es el best case scneario!!!!
DCF debes usar expected scneario (probability mean)

th adjustment” to the original EP? Present a brief list of the reasons for your decision.

cash flow dependind on their risk

 Exhibit 1
Centennial Pharmaceutical Corporation
CloneTech’s Original Earnout Program
(in millions of euros)1

Annual Bonus Schedule

Year 1 Year 2 Year 3
CloneTech Annual CloneTech Annual CloneTech
Earnings Bonus Earnings Bonus Earnings
Level Payment Level Payment Level
100% Bonus Level Earnings 10.00 2.00 12.00 2.00 14.40
75% Bonus Level Earnings 9.00 1.50 10.80 1.50 12.96
50% Bonus Level Earnings 8.00 1.00 9.60 1.00 11.52

Multiyear Bonus Schedule

Cumulative Cumulative Cumulative
Earnings Bonus Earnings
Level Potential Level
100% Bonus Level Earnings 22.00 4.00 36.40
75% Bonus Level Earnings 19.80 3.00 32.76
50% Bonus Level Earnings 17.60 2.00 29.12

1
Bonus payments were made each year based on the Annual Bonus Schedule and, if appropriate, the Multiyear Bonus Schedule.
MBS payments were distributed when the sum of all annual payments to date were less than the Cumulative Bonus Potential for that ye

Source: Created by author.

tion
m

Schedule
Year 3 Year 4
Annual CloneTech Annual
Bonus Earnings Bonus
Payment Level Payment
2.00 17.28 2.00
1.50 15.55 1.50
1.00 13.82 1.00

ultiyear Bonus Schedule

Cumulative Cumulativ Cumulative
Bonus e Earnings Bonus
Potential Level Potential
6.00 53.68 8.00
4.50 48.31 6.00
3.00 42.94 4.00

iyear Bonus Schedule.

ve Bonus Potential for that year.
 Exhibit 2
Centennial Pharmaceutical Corporation
CloneTech’s Revised Earnout Program
(in millions of euros)1

Annual Bonus Schedule—Year 2

CloneTech SRP’s Combined Annual

Earnings Earnings Earnings Bonus
Level Level Level Payment
100% Bonus Level Earnings 12.00 50.00 62.00 1.33
75% Bonus Level Earnings 10.80 50.00 60.80 1.00
50% Bonus Level Earnings 9.60 50.00 59.60 0.67

Annual Bonus Schedule—Year 4

CloneTech SRP’s Combined Annual
Earnings Earnings Earnings Bonus
Level Level Level Payment
100% Bonus Level Earnings 17.28 72.00 89.28 1.33
75% Bonus Level Earnings 15.55 72.00 87.55 1.00
50% Bonus Level Earnings 13.82 72.00 85.82 0.67

Bonus payments are made each year based on the Annual Bonus Schedule and, if appropriate, the Multiyear Bonus Schedule.
1

MBS payments are distributed when the sum of all annual payments to date are less than the Cumulative Bonus Potential for year 4.
In addition to bonus payments, guaranteed payments of EUR1 million, EUR1 million, and EUR2 million are paid at the end of years 2

Source: Created by author.

 Corporation
ut Program
os)1

Annual Bonus Schedule—Year 3

CloneTech SRP’s Combined Annual

Earnings Earnings Earnings Bonus
Level Level Level Payment
14.40 60.00 74.40 1.33
12.96 60.00 72.96 1.00
11.52 60.00 71.52 0.67

Multiyear Bonus Schedule

CloneTech SRP’s Combined Cumulative
Cumulative Cumulative Cumulative Bonus
Earnings Earnings Earnings Potential
43.68 182.00 225.68 4.00
39.31 182.00 221.31 3.00
34.94 182.00 216.94 2.00

ate, the Multiyear Bonus Schedule.

e Cumulative Bonus Potential for year 4.
EUR2 million are paid at the end of years 2, 3, and 4, respectively.
 Exhibit 3
Centennial Pharmaceutical Corporation
Capital-Market Conditions as of January 6, 2014

Eurozone Aaa Government Yields

3-year 0.47%
5-year 1.03%
10-year 2.20%
20-year 2.92%

Corporate Yields (3–5 year)

Aaa 1.02%
Aa 1.32%
A 1.58%
Baa 2.33%

Data sources: Datastream and “Statistics,” European Central Bank, January 14, 2016, http://www.ecb.europa.eu/stats/html/index
.europa.eu/stats/html/index.en.html (accessed May 31, 2016).