The Purpose of This Practice Exercise Is to Underscore How

Essay

The purpose of this practice exercise is to underscore how small changes in terminal value assumptions result in disproportionately large changes in firm value. Using the Excel spreadsheet model in the file folder entitled Target Valuation Model found on the companion website to this book, locate the present value of the Target's enterprise and equity values on the Valuation Worksheet and write them down. Increase the terminal value growth rate assumption by one percentage point and reduce the discount rate by one percentage point. How does this impact the firm's enterprise and equity value? Explain how this might happen (Hint: Consider the definition of the constant growth valuation model.) Click the undo command to eliminate changes to the base case model or close model but do not save the results.