Lecture 7 (2) - Forecasting Part I Lecture 7 Outline 1. 2....

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Forecasting – Part I Lecture 7
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Outline 1. Framework 2. Forecasting entire statements 3. The length of the forecasting horizons 4. Information used over the forecasting horizons 5. The size effect
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Forecasting Overview Forecast Sales Pro forma Statement of Cash Flows Pro forma Balance Sheet Pro forma Income Statement Forecast Leverage Property, Plant, & Equip Forecast Margins Forecast Turnovers Depreciation Expense Interest Expense Distributions to Equity Holders Other income and expense Other assets and liabilities
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Forecasting Overview - Key Insights Sales are the primary input to the forecasting process. The sales forecast is our basic statement about how rapidly the firm will grow. We apply a reverse ratio (DuPont) analysis – Operating income is forecasted from sales using the forecasted margins. Net operating assets are forecasted using sales via turnover ratios and financial leverage. The statement of cash flows is not forecasted but rather constructed based on the forecasted income statement and balance sheet. The pro forma statements are limited by the reliability of key assumptions and the inherent unforecastability of future events.
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Forecasting Overview - Key Insights Forecast a full set of financial statements. This approach can help the analyst potentially avoid internal inconsistencies. Examples of inconsistencies include: Expanded sales without expanded plant and working capital Need for new financing without additional interest Additional marketable securities without investment earnings Forecast income statement first, then the balance sheet, and then calculate the cash flow statement from the other two financial statements
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Forecasting Horizon Theoretically - the valuation of an equity security requires us to estimate and discount all the future cash distributions for the infinite future. But, practically we use two main periods in our forecast: Forecasting (Finite) horizon - for which we make explicit forecasts for each year Terminal period - We assume that, after this point, the financial statement line items settle down to a constant growth rate.
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This note was uploaded on 04/09/2010 for the course NBA 5090 taught by Professor Yehuda,nir during the Fall '10 term at Cornell University (Engineering School).

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Lecture 7 (2) - Forecasting Part I Lecture 7 Outline 1. 2....

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