429week08f07

429week08f07 - Week 8 Oct 15 Ratio Analysis Forecasting Pro...

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Week 8: Oct 15 Ratio Analysis Forecasting Pro Formas CF Considerations Comparables Analysis and Replication
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Ratio Analysis Forecasting Pro Formas Mock Income Statements and Statement of CFs Use predicted numbers Small things are easier to forecast than big things Example: Subscriber numbers are easier than net income Always start from the most fundamental drivers possible and move top-down. Example: Revenue drivers for cellular service may be expansion of availability, cost/min and market share. Forecast those and solve for revenue rather than directly. Forecast the numbers, ratios, or drivers that you are most sure about and then drive the rest of the pro forma from those key numbers.
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Ratio Analysis Always forecast to equilibrium Always build pro formas out to a horizon when the company has stabilized and none of the important ratios will experience any further change Be sure to identify difference types of items Some items are likely to grow constantly. Some are likely to stay constant and not grow. Others are not expected to recur at all. Be wary to adjust for these. Goal is to forecast CFs Must forecast NI (Income Statement), changes in WC (Balance Sheet), changes in debt (Financing) Some have to be assumed, others can be deduced.
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Using Ratios: Determine Industry trends for ratios and create pro formas that reflect those trends Example: you can predict changes in working capital by learning that the asset turnover is 2:1. Hence if the sales go up 20% this year, so will the asset side of the working capital. Particularly helpful on the balance sheet side, ratios can be used to forecast changes in the balance sheet since managers very often manipulate the b/s to achieve certain managerial and operational targets. I/S is more difficult to forecast using ratios
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429week08f07 - Week 8 Oct 15 Ratio Analysis Forecasting Pro...

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