09class10A

09class10A - Forecasting In chapter 10 we learn how to...

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1 Forecasting. In chapter 10 we learn how to forecast future performance of a company. After that we will learn how to transform these forecasts into an estimate of equity value.
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2 It is important to realize that what we are learning in Chapter 10 is more useful than simply a stepping stone to equity valuation. Forecasting in Chapter 10 is very similar to budgeting, so we are learning something about budgets as well. A budget is the expression in financial terms of a proposed plan of action by management for a specific period.
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3 This is the second time in the course that we use the term pro forma. Pro forma means according to form and contrasts with actual/official. Pro forma income was GAAP income revised by backing out one-time items. Pro forma financial statements are future/hypothetical financial statements (income statement, balance sheet and statement of cash flows) based on a number of assumptions.
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4 2. The six steps. The book recommends a six step procedure which we will cover The steps are: 1. Sales 2. Operating expenses 3. Assets 4. Liabilities and Contributed Capital 5. A. Interest expense and income, retained earnings B. balancing the balance sheet. 6. Statement of cash flows.
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5 3. Practical tips (from book) A. Although the steps are done in order they are interdependent. For example a forecasts of sales, the first step, would be impacted by capital expenditures, the third step. B.
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09class10A - Forecasting In chapter 10 we learn how to...

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