IP Valuation and Finance

IPSI - Summer 1995

 Final Examination

 

INSTRUCTIONS:

This is a closed book, no-notes examination. You may use a calculator and scratch sheets where necessary. Students for whom English is a second language may also use a language dictionary.

75% - The proctored portion of the examination consists of 15 true/false questions, 10 multiple choice questions, and three short essay questions. (112 points)

25% - Be sure to turn in the take-home portion of your examination, and make sure that your examination number is on all materials you turn in. (38 points)

True/False Questions (2 points for each question - 30 points total) Mark your answers on the answer sheet. Only the answer sheet will be graded.

Multiple Choice Questions (4 points for each question - 40 points total) Mark your answers on the answer sheet. Only the answer sheet will be graded. For the multiple choice questions be sure you mark all correct answers. For each multiple choice question there may be any number of correct answers (from 0 to 4).

Short Essay Questions (14 points per essay - 42 points total) Use the provided blue books to answer the questions. Write legibly on one side of the page only. Start each question on a separate page and clearly indicate the number of the question you are answering.

IMPORTANT - You must stop writing as soon as the proctor announces that the examination is over. Failure to do so may result in a conduct code violation.

GOOD LUCK AND HAVE A GREAT REMAINDER OF THE SUMMER

True/False Questions (2 points for each question - 30 points total)

1.  "Value" is a fixed, inherent property of any bundle of rights that can be transferred.

2. When one speaks of the "market price" of an asset it is based on the assumption that the asset would change hands between a willing buyer and a willing seller, both being adequately informed of relevant facts and neither being compelled to buy or sell.

3. The comparable market transaction method is one method of valuation that is rarely used today since computers have become cheap and readily available and can perform more sophisticated valuation techniques.

4. X is more valuable than Y if X has higher worth or importance to the decision-maker than Y.

5. A properly done asset appraisal is not a search for the single correct answer to the question, what is the asset worth?"

6. One of the characteristics of an asset is the probable capacity to produce future economic benefit.

7. The sale of knowledge or information assets is essentially the same as the sale of tangible assets with regard to the possession of the asset after transfer to the buyer.

8. The timing of when one receives information is often a significant factor of its value.

9. In that intangible assets are often more difficult to describe in any degree of detail and specificity when compared to tangible assets, the valuation of intangible assets can be more complicated than the valuation of tangible assets.

10. A properly done valuation is timeless.

11. Value is a measure or indicator of absolute worth or importance.

12. By any measure gold is considered more valuable than steel.

13. Internal Rate of Return (IRR) is the discount rate necessary to make a series of cash inflows and outflows equal to zero.

14. The standard decision-tree symbol for a chance or uncertainty Node is a square.

15. It is generally accepted that copyright damages cannot be assessed on the basis of speculation. However, uncertainty will not preclude a recovery of damages if the uncertainty is to amount but not as to the fact that actual damages are attributable to the infringement

Multiple Choice Questions (4 points for each question - 40 points total)

1. Post judgment interest is often available to the successful litigant in an infringement action. Which of the following would be logical choices in calculating post judgment interest?

a . The risk free rate.

b . The weighted cost of capital.

c . The T-bill rate.

d. The cost of debt.

2. Select each of the following that are correct regarding the concept of "value of use"?

a. These are damage calculations that have often been used by the courts to estimate the saved acquisition costs to the infringer.

b . The concept has been universally accepted as a potential measure of damages.

c. The concept is employed in copyright infringement cases.

d . The concept is employed in trademark infringement cases.

3. Which of the following factors may be considered in the determination of a reasonable royalty for a patent.

a . defendant's profits

b . licenses of similar patents

c - licenses of the patent to other parties

d. the cost to produce the infringing articles

4. While on summer break from law school in 1990 Keeno Lipleer wrote a popular, but violent, CD-ROM game entitled "Death & Destruction". Having previously attended an IPSI program at a famous New Hampshire law school Keeno duly registered the copyright to the game. Keeno also set-up a small corporation to distribute the game. The net profits of the corporation have been as follows:

Year Net Profits

1990 $10,000

1991 $10,000

1992 $10,000

1993 $5,000

1994 $5,000

Early this year, Keeno discovered that another company, Imotater, Inc., had included his game on an anthology CD-ROM that Imotater began distributing in 1993. The net profits of Imotater, Inc. from the infringing sales of "Death & Destruction" are as follows:

Year Net Profits

1993 $7,000

1994 $7,000

Keeno immediately hires the now famous Para Mason, known in the profession as the Lethal Litigator, to represent him. Para makes a first cut analysis of the value of case in order to explore the possibility of settlement. Which of the following are possible recovery combinations if Keeno prevails in his infringement action against Imotater, Inc.?

I. $10,000 in lost profits for the years 1993 and 1994 based on the argument that the precipitous drop in sales was due solely to the infringement by Imotater, Inc.

II. Statutory damages for the infringement.

III. Injunctive relief prohibiting any further sales of the the anthology CD-ROM that includes "Death & Destruction".

IV. $14,000 in defendant's profits from the infringement use. V. $2,000 for year 1993 and $2,000 for year 1994, based on the difference between Keeno's lost profits and Imotater's profits from "Death & Destruction".

a. 1, 111, 111 and IV.

b . III and either [I and VI or [11].

c . III, and any one of the following 1, H or IV.

d . 1, II III and [IV less V].

5. Paul Linolly, an attorney representing a major biotechnology company, would like to assess a settlement offer made by opposing counsel in a patent dispute. He has heard about the technique known as "risk analysis" or "decision-tree analysis" and would like to use the technique to evaluate the likely outcome of the dispute and make trade-offs among alternative litigation strategies and settlement offers. Which of the following are benefits of using the technique? (Select all answers that apply.)

a. It allows one to dissect a complex problem into smaller, manageable parts.

b . It forces lawyers to identify and assess the various uncertainties involved with the case. 

c. I It permits the consideration of multiple possible outcomes that stem from a decision.

d . It requires differential calculus and thus can be used to intimidate opposing counsel and uninformed judges.

6. All things considered equal, it is generally more valuable to have a dollar today than wait to receive the dollar at some time in the distant future. In order to determine the present value of a future dollar one must apply an appropriate discount rate. Which of the following is an element of the appropriate discount rate?

a. The risk aversion of the payor.

b. 'Me risk aversion of the recipient. 

c . The risk associated with receiving the future dollar.

d . The risk associated with potential future investments.

The following two questions refer to the unfinished balance sheet for the law firm of Bluster & Blohard (B&B) that is shown below:

Balance sheet for Bluster & Blohard

June 30, 1995

Assets Liabilities    
Cash on hand $ 10,000 Accounts Payable $45,000
Accounts Receivable $50,000 Pre-paid liability insurance $10,000
Office Equipment $150,000 Short term bank loan $50,000
Building  $1,500,000 Long term mortgage loan $750,000
    Less Accum. Deprec ($500,000)
Net Building $1,000,000

 Owners' Equity

???
Land $100,000

7. B&B is a well-known New Hampshire law firm that was founded in 1988 at the height of the state's real estate boom to serving the banking industry. Since that time the firms's reputation has grown to the point where often the mere appearanceof a B&B lawyer in a case win induce the other side to settle. Is this "reputation" an asset that has value to B&B?
 
a. Yes, because it is something B&B "owns" that can be used to produce income (or reduce costs).
 
b. No, because it is an intangible that cannot be precisely determined
 
c. Yes, but only when the organization is sold to new owners.
 
d. No, because a good reputation like B&B currently enjoys can largely disappear with one major scandal.
 
8. Which of the following are correct regarding B&B as of June 30, 1995?
 
a. The owners' equity was $750,000.
 
b . The "book value" of B&B's assets was $1,310,000.
 
c . B&B owned a building with a book value of $1,500,000.
 
d . The liabilities of B&B was greater than the owners' equity.
 
9. In the Newark Morning Ledger Co. v. United States case decided by the Supreme Court in 1993, a newspaper owner sought to depreciate the value of the at-will subscriber list that was acquired when the newspaper was purchased from the previous owner. Which of the following would be correct statements based on that 5-4 decision written by retiring Justice Blackmun?
 
a. A taxpayer is not allowed to depreciate an intangible asset unless that asset was acquired as part of a cash merger.
 
b . A taxpayer is not allowed to depreciate an intangible asset if that asset does not have a useful life that can be determined with reasonable accuracy.
 
c. A taxpayer is allowed to depreciate or expense the cost of acquiring any intangible asset at the option of the taxpayer, but cannot do both.
 
d . A taxpayer is allowed to depreciate an intangible asset if that asset can be valued and can be shown to have a limited useful life.
 
10. Due to a nearly insatiable need for funding, companies involved in biotechnology research and development have pioneered off-balance sheet investment structures to raise much needed capital. Which of the following are correct regarding such structures?
 
a. The creation of off-balance sheet investment structures requires finite-life assets such as patents to satisfy the requirements of the Federal tax code.
 
b. Many of the off-balance sheet investment structures involve warrants, which are federally guaranteed debentures.
 
c . Off-balance sheet investment structures come in many varieties. SPARCS, SWORDS and ARROWS share the common characteristic that the sponsoring parent company transfers certain intellectual property assets to a newly created affiliate organization.
 
d . Prior to the 1986 Federal income tax law changes, R&D Limited Partnerships offered investors greater tax sheltering than is possible today using such a structure.
 
Short Essay Questions (14 points per essay - 42 points total)
1 . Designer Genes, Inc., is a biotechnology company that was founded in 1993 by three retired professors from the University of New Hampshire. The company raised $10 million in 1994 in an initial public offering (IPO) in order to fund the development of a promising new drug treatment for a serious inherited childhood disease. It is estimated that the company is at least one year from having a patentable invention and any drug that may result is at least 10 years away from being marketable. The company has already spent half of the $ 10 million and is now spending at least $1 million a year on operations. The company is assessing its options for raising additional funds and consults you for insights. What alternatives are available to Designer Genes? Which alternative would you recommend and why?
 
2. Harlee Daveedcinq, a famous French singer, is about to sign a contract with Columbia Records to distribute his songs in the United States and Canada. It is expected that Harlee will be particularly popular among French speaking teenagers in Quebec and northern New England. Mr. Daveedcinq would like to explore his options regarding taxation of the royalties that he might earn in North America. What possible arrangements are possible to lessen Mr. Daveedcinq's potential tax burdens?
 
3. Linda Parisini is the principal shareholder and president of GameTech, Inc. GameTech is a software development and distribution company that holds various copyrights to a variety of computer games. The headquarters of the company is in New Hampshire, but all the programmers work out of the company's satellite office in Massachusetts near MIT. All the financial and personnel records of the company are kept in New Hampshire headquarters where the company also keeps its inventory and from which it ships its games to retail stores. Most of the computer game copyrights were originally issued to Linda Parisini who then assigned them to GameTech. These assignments were duly executed and recorded in the Copyright Office in Washington, D.C.
 
On February 1, 1995 GameTech approached Last Bank of New Hampshire for a loan. The main assets of GameTech are its portfolio of copyrights and a large number of computer games packed in boxes at the New Hampshire headquarters and waiting to shipped to stores. All these assets were offered to Last Bank as collateral for a $100,000 loan. Last Bank wants to make the loan and take a security interest in as many of GameTechs assets as it can. Last Bank has come to you for advice, what do you tell them?