Chapter_14 - Chapter 14 Chapter Simple Forecasting Simple...

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Chapter 14 Chapter 14 Simple Forecasting Simple Forecasting and and Simple Valuation Simple Valuation
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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?
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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
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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%
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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 = + =
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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 = =
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The Imperfect Balance Sheet The Imperfect Balance Sheet
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This note was uploaded on 10/07/2010 for the course ECTCS ec12947322 taught by Professor Johnathayeri during the Spring '10 term at Life.

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Chapter_14 - Chapter 14 Chapter Simple Forecasting Simple...

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