prospective analysis.DFI

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

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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.)

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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
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)

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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
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)

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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.
9-7 The Projection Process Target Corporation Income Statements

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9-8 The Projection Process Target Corporation Projected Income Statement
9-9 The Projection Process Target Corporation Projected Income Statement

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• Fall '14
• Generally Accepted Accounting Principles, projection process

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