Chapter_14 - Chapter 14 Chapter Simple Forecasting Simple...

Chapter 14
Chapter 14
Simple Forecasting
Simple Forecasting
and
and
Simple Valuation
Simple Valuation

Simple Forecasting and Simple
Simple Forecasting and Simple
Valuation
Valuation
LINKS
Chapter 13 developed a
simplified valuation model
based on forecastingly
operating profitability and
growth in investment in
operations
Link to Previous Chapter
This Chapter
Link to Next Chapter
Link to Web Page
This chapter develops simple
valuation models based on
forecasts of operating
profitability and growth from
information in the current
financial statements
Chapter 15 develops
complete valuations based
on information both within
and outside the financial
statements
The web page has more on
proforma analysis
How can a
growth forecast
be combined
with information
in the current
financial
statements to
give a valuation?
What valuations
can be made on
the basis of
current financial
statements?
What forecasts
can be made on
the basis of
current financial
statements?

What you will learn from this chapter
What you will learn from this chapter
•
How simple forecasts reduce the valuation task
•
How simple forecasts yield simple valuations
•
What forecasts can be developed from the current
financial statements
•
How sales forecasts are combined with forecasts from
financial statements
•
How simple forecasts and simple valuations work as
reasonable approximations
•
How simple forecasting can be used as an analysis tool
•
How simple forecasting is used in sensitivity analysis
•
How simple valuation models work in reverse
engineering
•
How simple valuation models enhance screening
analysis

The Perfect Balance Sheet
The Perfect Balance Sheet
MS, Inc.
Balance Sheet, December 31, Year 0
Assets Liabilities and Equity
Year 0
Prior
Year Year 0
Prior
Year
Marketable equity
securities (at market) 23.4 20.3 Long-term debt (NFO) 7.7 7.0
Common shareholders’
equity (CSE) 15.7 13.3
Net Operating Assets 23.4 20.3 23.4 20.3
Equity cost of capital = 12%
Debt cost of capital = 10%

Simple Forecasts: Forecasting
Simple Forecasts: Forecasting
from Book Values (SF1)
from Book Values (SF1)
MS Inc.
Pro Forma Income Statement, Year 1 Residual Earnings
Operating income: 0.1134 x 23.4 2.654 0
Interest expense: 0.10 x 7.7 (.770) 0
Earnings: 0.12 x 15.7 1.884 0
Earnings Component Forecast of Earnings Component Forecast of Residual Earnings
for the Component
Operating
Financing
Earnings
( 29
0 F 1
NOA 1 ρ OI - =
( 29
0 D 1
NFO 1 ρ NFE - =
( 29
0 E 1
CSE 1 ρ Earn - =
( 29
0 NOA 1 ρ OI
0 F 1
= - -
( 29
0 NFO 1 ρ NFE
0 D 1
= - -
( 29
0 CSE 1 ρ Earn
0 E 1
= - -
The required return for operations weights the equity cost of capital (12%)
and the cost of debt (10%) by their respective values given in the fair value
balance sheet:
Required return for operations 11.34% 10.% x
23.4
7.7
12.0% x
23.4
15.7
=






+






=

SF1 Valuation
SF1 Valuation
( 29
Ratios P/B Normal
NOA
NOA
0
V
0
CSE
E
0
V
=
=
23.4 V
15.7 V
Inc. MS For
NOA
0
E
0
=
=

The Imperfect Balance Sheet
The Imperfect Balance Sheet
PPE, Inc.