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.
-Based on your answers to questions 1, 2, and 3, what do you believe are the most important value drivers for Life Tech based on their impact on the firm's enterprise and equity values? List these variables in descending order in terms of their impact on increasing the magnitude of Life Tech's enterprise and equity values.

Question

Quizplus · Accepted Answer

The Answer is The most important value driver is the change in sales followed by the change in cost of sales, then change in capital structure, and finally changes in receivables and inventories. Note that this ordering is dependent on the magnitudes of the assumed changes in value drivers. Note also that the percent changes in enterprise and equity values reflect the cumulative effects of previous changes made to value drivers.

\begin{array}{c} ext { Life Technology Value Drivers in Descending Order of Importance }\\begin{array}{|l|c|c|c|c|}\hline{ ext { Value Drivers }} & \begin{array}{c} ext { Enterprise Value } \ ext { (\$Billions) }\end{array} & \begin{array}{c} ext { Pct Change } \ ext { Over Base } \ ext { Case }\end{array} & \begin{array}{c} ext { Equity Value } \ ext { (\$Billions) }\end{array} & \begin{array}{c} ext { Pct. Change } \ ext { Over Base } \ ext { Case }\end{array} \\hline ext { Base Case } & 18.356 .3 & & 16,570.9 & \\hline ext { Changes to Base Case } & & & & \\hline \begin{array}{l} ext { Sales Growth Rate } \-- ext { Increase by two percentage } \ ext { points }\end{array} & 22,067.2 & 20.2 & 20,281.8 & 22.4 \\hline \begin{array}{l} ext { Cost of Sales as \% of Sales } \ ext {--Reduceby two percentage } \ ext { points }\end{array} & 24,315.7 & 32.5 & 22,530.3 & 36.0 \\hline \begin{array}{l} ext { Days in Receivables } \ ext {--Reduceby ten days }\end{array} & 24,571.2 & 33.9 & 22,785.8 & 37.5 \\hline \begin{array}{l} ext { Days in Inventory } \ ext {--Reduceby ten days }\end{array} & 24,675.9 & 34.4 & 22,890.5 & 38.1 \\hline \begin{array}{l} ext { Target Debt to Equity } \ ext {--Increase from } 30 \% ext { to } 75 \%\end{array} & 25,162.2 & 37.1 & 23,370.8 & 41.0 \\hline\end{array}\end{array}

Use the Microsoft Excel Model in a File Folder Entitled