prospective analysis.DFI

prospective analysis.DFI - 9-1 Prospective Analysis...

Info icon This preview shows pages 1–10. Sign up to view the full content.

9-1 Prospective Analysis Prospective Analysis as by K. R. Subramanyam and John J. Wild in “Financial Statement Analysis” 10 th Edition. NB: The examples in this ppt. are derived from the book. (Chapter 9: Prospective Analysis.)
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

9-2 Prospective Analysis Security Valuation - free cash flow and residual income models require estimates of future financial statements. Management Assessment - forecasts of financial performance examine the viability of companies’ strategic plans. Assessment of Solvency - useful to creditors to assess a company’s ability to meet debt service requirements, both short-term and long-term. Importance
Image of page 2
9-3 The Projection Process Projected Income Statement Sales forecasts are a function of: 1) Historical trends 2) Expected level of macroeconomic activity 3) The competitive landscape 4) New versus old store mix (strategic initiatives)
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

9-4 The Projection Process Steps : 1. Project sales 2. Project cost of goods sold and gross profit margins using historical averages as a percent of sales 3. Project SG&A expenses using historical averages as a percent of sales 4. Project depreciation expense as an historical average percentage of beginning-of-year depreciable assets 5. Project interest expense as a percent of beginning-of- year interest-bearing debt using existing rates if fixed and projected rates if variable 6. Project tax expense as an average of historical tax expense to pre-tax income Projected Income Statement
Image of page 4
9-5 The Projection Process Ratios: a) Sales Growth = (Current Year – Previous Year Sales) / Previous Year Sales b) Gross Profit Margin = Gross Profit / Sales c) Selling, General and Admin Expenses / Sales d) Depr. Expense / Gross Prior Year P, P & E e.g. for 2005 = 1259 ( Depr. Expense for 2005) / 19880 ( P, P & E for 2004)
Image of page 5

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

9-6 The Projection Process Ratios (cont.) e) Interest Expense / Prior Year Long Term Debt e.g. for 2005 = 570 ( interest expense for 2005) / 10155+863 ( Long Term debt + Current Position of L.T. Debt for 2004) f) Income Tax Expense / Pretax Income •) NB: For our purposes we project values using the most recent ratios or margins.
Image of page 6
9-7 The Projection Process Target Corporation Income Statements
Image of page 7

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

9-8 The Projection Process Target Corporation Projected Income Statement
Image of page 8
9-9 The Projection Process Target Corporation Projected Income Statement
Image of page 9

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

Image of page 10
This is the end of the preview. Sign up to access the rest of the document.
  • Fall '14
  • Generally Accepted Accounting Principles, projection process

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern