Use the Microsoft Excel Model in a File Folder Entitled

question 26

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.
-Using the model results from question (1), the CFO believes that in addition to an increase in the sales growth rate and an improving cost position, Life Tech could employ its assets more effectively by better managing its receivables and inventory. Specifically, the CFO directs you as a financial analyst to make the following changes to days sales in receivables and days in inventory. On the Target Assumptions Worksheet, make the following changes and note their impact on Life Tech's enterprise and equity values on the Valuation Worksheet:
a. Reduce receivables days by ten days starting in 2014
b. Reduce inventory days by ten days starting 2014
What is Life Tech's enterprise and equity value resulting from these changes? How do they compare to the results in question one? Briefly explain why each of these changes affects firm value. Do not undo the changes to the model you have made.

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Definitions:

Variance

A measure of the dispersion of a set of data points around their mean, indicating how spread out the data points are.

Standard Deviation

A measure of the dispersion or variability of a set of data points, indicating how spread out the values are from the mean of the data set.

Biased Estimates

Estimates that are systematically off-target in a certain direction due to errors in methodology or sample selection.

Absolute Value

The non-negative value of a number without regard to its sign; for example, the absolute value of both -5 and 5 is 5.