Tasks:

1. Using the residual income model, prepare a valuation of the common stock of Best Buy as of Year 2 under the following assumptions
   1. Forecast horizon of five years (years 3 7)
   2. Sales growth of 10% for Best Buy per year over the forecast period and 3.5% thereafter (terminal year).
   3. All financial ratios remain at Year 2 levels.
   4. Cost of equity capital is 12.5%.

All tasks should be answered using excel. You may want to copy and paste financial information into the template file to be able to link cells to the financial model.

2. Copy and paste your original model (from task 1) into a separate tab in the same excel file and run the following sensitivity analyses:

Growth rate equals 1% each year during the forecast horizon (i.e. type in 1% for sales growth in years 3 - 7) and remains at 3% thereafter. Explain your finding with respect to the new share price.

3. Copy and paste your original model (from task 1) into a separate tab in the same excel file and run the following sensitivity analysis:

Cost of equity increases to 15%. Explain you finding with respect to the new share price.

Best Buy Year 2 Year 1 BALANCE SHEET Cash Receivables Inventories Other Total current assets Year 2 Year 1 746 751 313 262 1,767 1,184 102 41 2,928 2,238 Income statement Net sales Cost of goods Gross profit Selling general & administrative Depreciation & amortization expense Income before tax Income tax expense Net income Outstanding shares ##### #### I!!!! 3,059 2,393 2,251 1,728 167 103 641 562 245 215 396 208 200 Property, plant & equipment Accumulated depreciation Net property & equipment Other assets Total assets 1,987 1,093 543 395 1,444 698 466 59 4,838 2,995 347 RATIOS ##### ##### ##### Accounts payable & accrued liabilities Short-term debt & cmltd Income taxes Total current liab 2,473 1,704 114 16 127 65 2,714 1,785 Sales growth Gross Profit Margin Selling General & Administrative Exp / DEPRECIATION (depn exp / pr yr PPE gross) Tax (Inc Tax / Pre-tax inc) ##### ##### Long term liabilities Long term debt Total long-term liabilities 122 181 303 100 15 115 20 Common stock Capital surplus Retained earnings OTHER EQUITIES Shareholder equity Total liabilities & net worth 20 576 1.225 247 828 1.821 1.095 4,838 2,995 RATIOS AR turn INV turn AP turn Tax Pay (Tax pay / tax exp) FLEV Divlsh 48.96 47.69 6.94 8.53 4.96 5.93 ########## 2.66 2.74 $0.00 $0.00 CAPEX CAPEX/Sales 1029 416 6.717 3.33% Best Buy Year 2 Year 1 BALANCE SHEET Cash Receivables Inventories Other Total current assets Year 2 Year 1 746 751 313 262 1,767 1,184 102 41 2,928 2,238 Income statement Net sales Cost of goods Gross profit Selling general & administrative Depreciation & amortization expense Income before tax Income tax expense Net income Outstanding shares ##### #### I!!!! 3,059 2,393 2,251 1,728 167 103 641 562 245 215 396 208 200 Property, plant & equipment Accumulated depreciation Net property & equipment Other assets Total assets 1,987 1,093 543 395 1,444 698 466 59 4,838 2,995 347 RATIOS ##### ##### ##### Accounts payable & accrued liabilities Short-term debt & cmltd Income taxes Total current liab 2,473 1,704 114 16 127 65 2,714 1,785 Sales growth Gross Profit Margin Selling General & Administrative Exp / DEPRECIATION (depn exp / pr yr PPE gross) Tax (Inc Tax / Pre-tax inc) ##### ##### Long term liabilities Long term debt Total long-term liabilities 122 181 303 100 15 115 20 Common stock Capital surplus Retained earnings OTHER EQUITIES Shareholder equity Total liabilities & net worth 20 576 1.225 247 828 1.821 1.095 4,838 2,995 RATIOS AR turn INV turn AP turn Tax Pay (Tax pay / tax exp) FLEV Divlsh 48.96 47.69 6.94 8.53 4.96 5.93 ########## 2.66 2.74 $0.00 $0.00 CAPEX CAPEX/Sales 1029 416 6.717 3.33%