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Formula
=B12*(1+$B$2)
= - C12*$B$3
= - C28*$B$4
=SUM(C12:C14)
=-C15*$B$5
=SUM(C15:C16)
=C17*$B$6
=C17-C18
=C12*(1+$B$2)*$B$7
=C12*$B$8
=C22+C23
=B26
=B27+C19
=C24-C26-C27-C29
=C12*$B$9
=SUM(C26:C29)
Task 1
Use the model that you now have available. Analyze the solvency (equity to asset ratio) over
the five-year period. How sensitive is the development to the assumed turn-over growth?
Check this by letting g equal 5, 10, and 15 %, respectively. Show your results in a graph.
What explains this effect?
Then: What is going to happen if you would prolong the model over some years? Illustrate
and explain what you find.
Expanding the first model
This first model is full of weaknesses and simplifications. The next step will therefore be to
make the model more complex but also more realistic. The following areas are simple to
extend to model to accommodate. Note: take each step separately that means save each
extension in a separate worksheet.
Likewise, the cost of sales should probably (in most cases) be modeled as varying, and in
addition with larger precision.
(c)Taxes
Again, assume a growth rate of 10%. The formula included for calculating net profits is valid
only if profits before taxes are positive. What happens in the model when the company makes
losses? Try!
To allow for a more realistic treatment here replace the tax formula for year 1 with the
following formula: =IF(C15>0;-$B$5*C15;0).
This formula provides a logical test and return one value if the test is true (-B5*C15), and
another value if the test if falsified (= 0).
Task 2
Make the necessary changes in model 1 and re-run Task 1 for each (a) to (c). Is there any
changes? Explain your findings.
Formula
=B30-B33-B35-B36
=B30*(1-B12)-B36
Task 4: Analyze how changes in the turnover growth will affect the passive side of the
Balance statement. Explain your findings!
common to do like this, especially if there is a need to build a buffer for future investment. A
set of new rows and items will be introduced in the worksheet model to include this
behaviour.
Note that long-term debt will be the plug if the firm needs to raise new debt. On the other
hand, if the firm has excess funds available the plug is the short-term deposit. This means that
the amount of debt does not decrease from one year to another. A logical test is introduced to
govern the financing choice.
The following new items and formulas should be taken into account:
Item
Interest income
Short-term deposits
Long-term debt
Formula (year 1)
=C30*$B$5
=IF((C37-C28-C29)>0;C37-C28-C29;0)
=IF((C28+C29-C33-C34C36)>B35;C28+C29-C33-C34-C36;B35)
Please, note that some of the assumptions in the input area field have been changed in this
model extension. Be careful in preparing this worksheet!
Task 4
Calculate the equity ratios for this model. Then change the turnover growth rate to 20%
instead of 10%. How does this affect short-term deposits and the equity ratios? Explain!
Formula (year 1)
=C19
=-C16
=-C18*(1+(C20/C19))
=-C17*(1+(C20/C19))
=B29-C29
=C36-B36
=SUM(C40:C45)
=B28-C28-C16
=SUM(C46:C47)
=C35-B35
=C42
=C43
=SUM(C48:C51)
Task 5
Provide a Table showing for each of the five years how sensitive FKFA is to various levels of
the growth rate in sales. Assume growth rates to be 10%; 20% or 40%. Hint: use the Data
menu and then the Table sub-menu for this task. Ask if you need assistance! Explain your
findings! This explanation is non-trivial so please pay thorough attention to this explanation.
You should also prepare a Figure based on your sensitivity analysis. The Figure should be like
Final step
We then turn to the calculation of the value of the firm using the FKFA measure. Assume that
the required return on equity is 20% and that the permanent income growth rate after five
years is 5% in order to calculate the value of the firm (based on FKFA).
In this step you should add formulas to the worksheet in order to:
1. Calculate the present value of annual FKFAs during year 1-5. Apply the formula
=NPV($B$55;C52:G52)
2. Calculate (using a growth value formula) the perpetual value after year 5. This is
denoted Ending value. Apply the formula =G52*(1+B56)/(B55-B56)
3. Transform the Ending value to a present value at t = 0. Apply the formula
=PV($B$55;5;;-B59)
4. Add the values under step 1 and 3. That will be the value of the firm
Successful completion of these steps should give a worksheet that looks like
Finalize this assignment by showing how sensitive the value of the firm is to the assumed
permanent growth rate.