4.2-Forecasting-Cash-Flows-_back-to-the-future_.pdf - Module 4 The Language and \u2028 Tools of Financial Analysis Forecasting Cash Flows(Back to the

# 4.2-Forecasting-Cash-Flows-_back-to-the-future_.pdf -...

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1 Presenter: The Language and Tools of Financial Analysis Forecasting Cash Flows (Back to the future) Paul Kofman Module 4 DCF analysis requires estimates of future cash flows. Consider the value of the firm to the shareholders. We need to forecast cash flows over the firm’s expected life ( 0,….,n ). What do we need when using DCF? ( ) ( ) ( ) 1 2 1 2 ... 1 1 1 n n CF Cash Flow CF Firm Value r r r = + + + + + +
2 We know that future cash flow diminish in present value the further they are in the future. So where do we draw the line? We distinguish between short-term predictable cash flows and long-term sustainable cash flows. When does forecasting make sense? Firm Value = Expected ( Cash Flow 1 ) 1 + r ( ) 1 + E ( CF 2 ) 1 + r ( ) 2 + ... + E ( CF n ) 1 + r ( ) n Length (n) of the predictability in cash flows depends on: size/maturity of the firm competition current growth Forecast horizon
3 Estimate historical earnings growth – past is a guide to the future. For the valuation of large established corporations this works, but for new investment projects, history is a poor guide.

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