The Purpose of This Practice Exercise Is to Illustrate How

question 21

Essay

The purpose of this practice exercise is to illustrate how a change in an input cell impacts variables on other financial statements. Using the Excel spreadsheet model in the file folder entitled Target Valuation Model on the companion website accompanying this book (see the beginning of this chapter for website address), note the values for 2018 of Target's net income (Target IS Worksheet), cash balance and shareholders' equity (Target's BS Worksheet), and enterprise value and equity value (Target Valuation Worksheet).
Change the Target's revenue growth rate assumption by one percentage point in 2014. On the Target's Assumptions Worksheet, increase the growth rate from 5.5 to 6.5 percent in the yellow input cell on the Sales Growth line for the year 2014. What are the new values in 2018 for net income, cash balance, shareholders' equity, enterprise value, and equity value following the increase in the growth rate assumption in the base case is increased by one percentage point? Explain why these variables increased (Hint: See Figure 9.1)? When done, click the undo command or close the model but do not save the output to restore the base case model results.

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Definitions:

Activity-Based Costing

A costing method that assigns overhead and indirect costs to specific activities, improving costing accuracy.

Overhead Cost

Indirect costs of running a business that are not directly tied to a specific product or service, such as rent, utilities, and administrative expenses.

Product Q06F

A specific product identifier, which could refer to a particular item or service offered by a company.

Activity-Based Costing

A costing method that assigns costs to products based on the activities required for their production, attempting to more accurately trace indirect costs to products.