Use the Microsoft Excel Model in a File Folder Entitled

question 81

Essay

Use the Microsoft Excel model in a file folder entitled Target Valuation Model on the companion site to this book to address the following questions. The model already contains data and an estimate of Life Tech’s enterprise and equity valuations based on this data and a set of assumptions about the planning period spanning 2014 through 2018, as well as the years beyond. In answering the following questions, assume the valuation provided in this model represents the firm’s base case and reflects what the firm could do if it continued the business strategy in effect in 2012.
-Given the results of the model from questions (1) and (2), assume Mr. Lucier and the Life Tech board increased their target debt to equity ratio from 30 percent to 75 percent. Recalculate the firm's weighted average cost of capital assuming that none of the assumptions about the cost of capital made in the base case have changed, with the exception of the levered beta. (Hint: The levered beta needs to be unlevered and then relevered to reflect the new debt to equity ratio). Without undoing the assumption changes made in questions (1) and (2), use your new estimate of the firm's WACC during the planning period to calculate Life Tech's enterprise and equity values given on the Valuation Worksheet. Briefly explain why the change in the debt to equity ratio affected firm value.

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Definitions:

Corporation

A corporation is a legal entity that is separate and distinct from its owners, authorized to act as a single entity and recognized as such in law for the purposes of conducting business, borrowing funds, suing, and being sued.

Accounts Payable

Money owed by a company to its creditors for goods or services that have been delivered but not yet paid for.

Fair Value

The estimated market price of an asset or liability, based on current conditions and the willing buyer-seller principle.

Capital

The owner’s investment of equity in the company.