Vyaderm Pharmaceuticals Case

Assignment
Advanced Corporate Finance
Submitted By: -
S.No Name oll No
! Abhishek Kumar Singh EPGP-04A-005
" Deepak Mittal EPGP-04A-026
# Kiran Babu S EPGP-04B-04
$ San!a" Kumar Pari#a EPGP-04A-0$4
% %i&ek 'al(ar EPGP-04A-)
Case Summary
%"a#erm starte# its *perati*ns sin+e ,45 an# (as #*ing (ell- %e#rine t**k *&er as .E/ 0r*m 1inn-
Sin+e %e#rine t**k *&er2 the pr*0itabilit" began t* slip an# %e#rine (as un#er l*t *0 pressure- %e#rine
inten#e# t* implement E%A appr*a+h 0*r the per0*rman+e measure-
EVA = Net profit after taxes (Capital x cost of Capital)
Under GAAP, R&D expenditure is amortied on strai!"t line #asis o$er %
&ears'
Under GAAP, Ad$ertisin! expenditure is amortied on strai!"t line #asis o$er
( &ears'
Under GAAP, Good)ill is amortied on strai!"t line #asis o$er *+ &ears'
Amortization Estimation
The estimation for amortization of these expenditures is given below:
R! Amortization
S"hedule for #$$$
,ear -../ -..0 -..1 -... 2+++ 2++-
R&D expenses -2*10 -*/-+ -0+.* 2++++ (.+++
*%/(
+
Amortiation for 34A
Ad5ustment
-../ 2*.0 2*.0 2*.0 2*.0 2*.0
-..0 2.22 2.22 2.22 2.22 2.22
-..1 (*-. (*-. (*-. (*-.
-... *+++ *+++ *+++
2+++ 01++ 01++
2++- .-2/
R&D Amortiation for 2+++
and 2++- 2*.0 %*-. 11(1 -21(1 2+/(1
202/
0
Cumulati$e R&D expenses -2*10 20+.0 **-.- /*-.-
-+(-.
-
-*11
2-
6ess cumulati$e amortiation 2*.0 0.-/ -/0%* 2.%.2 %+2(+
00*.
0
Capitalied R&D for 2+++ and
2++- 34A %2./-
0-(2
*
Advertisement Amortization
S"hedule for #$$$
,ear -../ -..0 -..1 -... 2+++ 2++-
Ad$ertisin! expenses (* (1 *- *% %+ %%
Amortiation for 34A Ad5ustment
-../ -- -- --
-..0 -( -( -(
-..1 -* -* -*
-... -% -% -%
2+++ -0 -0
2++- -1
Ad$ertisin! Amortiation for
2+++ and 2++- -- 2* (1 *2 */ %+
Cumulati$e ad$ertisin! expenses (* 02 --( -%1 2+1 2/(
6ess cumulati$e amortiation -- (% 0( --% -/- 2--
Capitalied Ad$ertisin! for 2+++
and 2++- 34A *0 %2
%oodwill Amortization S"hedule for
#$$$
,ear -../ -..0 -..1 -... 2+++ 2++-
Good)ill expenses + 2%++ 2%++ 2%++ 2%++ 2%++
Amortiation for 34A Ad5ustment
-..
/
-..
0 /( /( /( /( /(
-..
1 /( /( /( /(
-..
. /( /( /(
2++
+ /( /(
2++
- /(
Good)ill Amortiation for 2+++
and 2++- + /( -2/ -1. 2%2 (-%
Cumulati$e Good)ill expenses + 2%++ %+++ 0%++ -++++ -2%++
6ess cumulati$e amortiation + /( -1. (01 /(+ .*%
Capitalied Good)ill for 2+++ and .(0+ --%%%
2++- 34A
EVA has & elements7 34A centers, 34A dri$ers and 34A8#ased incenti$e
pro!ram'
9or t"e 34A #ased incenti$e pro!ram, a tar!et #onus is set' :"e pa&out of t"e
tar!eted #onus depended on t"e performance of t"e rele$ant 34A centre;s to
)"ic" t"e mana!er is assi!ned' <o t"e #onus is dependent upon t"e 34A
tar!et and 34A inter$al'
EVA performan"e = -= ((Actual >mro$ement8>mro$ement Goal)? >nter$al)
Cal"ulated 'onus = :ar!et @onus x 34A Performance ,ear 2+++
!ivisional (anager)s Salary = A2+++++
'onus target = /+B of salar& = -2++++
EVA *mprovement goal = A2-%+
EVA Target = A%+0+
EVA *nterval = A-2+++
As per t"e formula and Table A t"e #onus of t"e Cana!er can #e determined'
Case Analysis
'he intr*#u+ti*n *0 the E%A s"stem ha# s*me *b&i*us p*siti&e e00e+ts *n the st*+k pri+e *0 the +*mpan"-
3*(e&er the" begin t* 0all a0ter Mar+h 2000- As is e&i#ent 0r*m the en#ing bank balan+e *0 the manager
0*r 2002 n*t *nl" (ill she n*t get an" b*nus 0*r the "ear 200 but (ill ha&e t* (*rk *00 the negati&e
balan+e 0*r the "ear 2002 an# *n(ar#s-
3*(e&er2 the lump sum she gets in 2000 is &er" large +*mpare# t* her usual annual b*nus- 4n 0a+t it is
m*re than 4 times her b*nus in ,,,- Sin+e she kn*(s her b*nus ma" n*t materiali5e 0*r man" "ears 6it
#epen#s *n 0a+t*rs that are n*t entirel" in her +*ntr*l72 (hat8s st*pping her 0r*m taking the b*nus this
"ear an# 9uitting the ne:t;
&he current system is obviously 'la(ed but not irredeemably so-
Re"ommendations
/ne suggesti*n is ha&ing a +ap an# a thresh*l# 0*r b*nus pa"*uts *0 e:+epti*nall" g**# an# ba# "ears
respe+ti&el"- 'his #*es n*t mean that the manager8s earne# b*nus (ill be +appe# 0*r g**# "ears< it (ill
!ust sta" in his b*nus bank- Similarl"2 0*r reall" ba# "ears s*me thresh*l# pa"*ut (ill still be ma#e an# in
+ase the bank balan+e is 5er* *r negati&e it (ill be treate# as a l*an 0r*m the +*mpan" (hi+h has t* be
pai# ba+k interest 0ree2 the manager (ill ha&e the *pti*n *0 re0using this l*an-
But (e belie&e that the (a" the b*nus is being +al+ulate# right n*( (ill n*t be a++epte# 0*r l*ng be+ause
*0 the &ari*us pr*blems *utline#-
)e suggest assigning goal (eights in such a (ay so as to measure Controllable to a ma*imum.