Chapter9 - Prospective Analysis CHAPTER 9 Prospective...

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9 CHAPTER Prospective Analysis
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Prospective Analysis Importance 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 - prospective analysis is useful to creditors to assess a company’s ability to meet debt service requirements, both short-term and long-term.
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The Projection Process Projected Income Statement Sales forecasts are a function of: 1) Historical trends 1) Expected level of macroeconomic activity 1) The competitive landscape 4) Strategic initiatives of management
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The Projection Process Projected Income Statement 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
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The Projection Process Target Corporation Projected Income Statement
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The Projection Process
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