Question

LSports America is in the business of designing and manufacturing running shoes for long distance runners. They are considering a $300 million upgrade to their production line for the smart watch- connected shoe that has Bluetooth connectivity. LSports America has recently hired some design engineers from ABC in hopes of expanding their offerings in this area. The potential cash flow is estimated at net revenues of $560 million per year for four years. Recently, they were advised of potential patent infringement and have been the subject of speculations of industrial espionage. To eliminate this problem, they are considering buying a license. ABC will sell a license that is good for four years of exclusive use of the patent and associated intellectual property. LSports America uses a corporate MARR of 15% and their risk-free alternatives are 7%. The VP of Engineering at LSports America estimates market volatility in demand is 50%. The VP of Marketing estimates market volatility in demand at 35%. 1. You are in charge of intellectual property at Jiang Sports America, what is the most you should pay for a license from ABC. 2. Historically, LSports America is known to be liberal in ignoring intellectual property claims. Imagine they just go ahead with the project as stated above. (In other words, they decide not to pay for the license.) ABC aggressively protects their property and sues immediately. Sometime in year 2, (from the start of the effort) a court decision requires LSports America to reimburse ABC $700 million. They pay at the end of year 3. How does this strategy work for them? Are they better off licensing or being aggressive? 3. Another alternative route is as follows: Pay ABC to build 10,000,000 pairs a year at $25.00 a pair for four years. Is this a better path? Why or why not?

Answer 1

Géren in forma non - cash oudylowo - $ 300 million is cash in low . $ 560 million MARR = 15% Risk free pak = volatility (B) = D.S. year 7% for u years. cost of capital CEAPM Mode 1) B + B CRM-R3 = 007* 05 0.15 -0.07) O or 11, present value of cash cingloo un poco x annuity at un = 560 * 3.10204 1732.3664 million, at 11% Damount payable por license 1237.366U - 30 1432-3664 million by Lsport America decided to be aggressive L Sport end up wom paying amount of & 700 x 0 2311 (Present ralen at god year) 511.22 Prosit or loss under this alternative Per q din ploua - prq out flowe 12373664 - 811-29 (300 + 511.az) 925.59644

Alternative -3 alory pairs each year = lomillion Total pairs for u years: 10x uz to million price I pair - 25 Present value of outflow 10 tom x 25 x 3.102uu = 225.61 Фssi os tои - drog un yow - por of ocet loco = 1237.366u - 1075.61 C300 + 295.61). 661.2564