Question

Carla Vista Pharmaceuticals entered into a licensing agreement with Zenith Lab for a new drug under development. Carla Vista will receive $8450000 if the new drug receives FDA approval. Based on prior approval, Carla Vista determines that it is 90% likely that the drug will gain approval. The transaction price of this arrangement should be $0 until approval is received. a.$7605000. b.$8450000. c.$845000.

Answer 1

Answer:

Depends on the valuation method, it can be either:

A) $7,605,000

B) $8,450,000

Explanation:

A) If Carla Vista uses the "expected value method", then the transaction price of this arrangement should = $8,450,000 x 90% = $7,605,000

B) If Carla Vista uses the "most likely method", then the transaction price of this arrangement should = $8,450,000