Web3ch15 - CHAPTER FIFTEEN Full-Information Forecasting,...

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CHAPTER FIFTEEN Full-Information Forecasting, Valuation, and Business Strategy Stephen H. Penman The web page for this chapter runs under the following headings: What this Chapter is Doing Get Ready for Full Forecasting and Valuation The One-stop Forecast of Residual Operating Income Analysis, Forecasting, and Valuation: Cisco Systems (CSCO) A Demonstration of how Alternative Valuation Models Produce the Same Valuation Maytag Corporation: Financial Statements What this Chapter is Doing In laying out the simple valuations, Chapter 14 explained what are the drivers to be forecasted to reach a valuation. Simple valuations use the current values for these drivers in the financial statements (sometime modified with a sales growth forecast). Full forecasting and valuation in Chapter 15 merely replaces these financial statement numbers with forecasts that the analyst develops from his or her research. Forecasting is also referred to as pro forma analysis. Chapter 15 shows how to do this formally. Exhibits 15.1 and 15.2, along with Steps 1-15, summarize the methods. Having appreciated the process, go to the BYOAP feature on the book’s web site to build a spreadsheet that embodies it. Yu will than have a valuation and analysis tool for full forecasting and valuation. Get Ready for Full Forecasting and Valuation Forecasts do not come out of the air. It is a mistake to “assume” (a sales growth rate, for example). Rather, forecasts come from the information at hand. The analysis must “know the business” before proceeding. Refer back to the step-by-step summary in Figure 3.3 in Chapter 3. Go back to this material on The Analysis of Business in Chapter 1. Read the Focusing the Lens material in Chapter 15. Then you will be ready to proceed to pro forma analysis.
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The One-stop Forecast of Residual Operating Income Chapter 14 and the financial statement analysis of earlier chapters point to the key drivers that have to be forecasted to reach a valuation. The web page for Chapter 14 applies these drivers to a simple valuation of Electronic Data Systems (EDS). The formula 15.1 in Chapter 15, provides a neat, one-step calculation of residual operating income (ReOI). For the EDS example on the Chapter 14 web page, the inputs to the forecast for 2003 are as follows: Sales 21,932 Profit Margin (PM), including core other income 5.67% Asset Turnover (21,932/10,971) 2.00 Required return for operations 9.0% The ReOI forecast for 2003, applying the one-stop method is - × = 00 . 2 09 . 0 0567 . 0 932 , 21 Re 2003 OI = 257 The turnover efficiency ratio, 00 . 2 09 . 0 = 0.045 is smaller than the profit margin. Sales add value, and each dollar of sales adds value of 5.67 cents – 4.5 cents = 1.17 cents. Analysis, Forecasting, and Valuation: Cisco Systems (CSCO)
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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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Web3ch15 - CHAPTER FIFTEEN Full-Information Forecasting,...

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