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Chapter 06 Questions and Problems

# Chapter 06 Questions and Problems - ENTREPRENEURIAL FINANCE...

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E NTREPRENEURIAL F INANCE : Strategy Valuation and Deal Structure Chapter 6. Methods of Financial Forecasting: Revenue Questions and Problems 1. Suppose that for an existing business we observe the following levels of sales and macroeconomic information for the previous six years: Year -6 -5 -4 -3 -2 -1 Sales (millions) \$5.30 \$5.70 \$5.50 \$6.30 \$7.50 \$8.00 Inflation 3.00% 2.00% 5.00% 3.00% 4.00% Change in Real GDP 1.00% -2.00% 2.00% 3.00% 1.00% Use the information in the table to generate sales forecasts for Year 0 by the following approaches. a. Extrapolation based on nominal percentage growth rates of sales. b. Extrapolation based on real percentage growth rates in sales. Expected inflation in Year 0 is 2.0 percent. c. Extrapolation applied to nominal sales, with greater weight on the more recent data. d. Extrapolation based on the relationship between the real sales growth rate and the annual change in real GDP. The forecast of real GDP growth for year zero is 2.5 percent. e. Based only on the information in the table and the results of your calculations, which approach do you think will do the best job of forecasting sales for this venture? Why? 2. Suppose that for an existing business we observe the following levels of sales and macroeconomic information for the previous six years: Year -6 -5 -4 -3 -2 -1 Sales (millions) \$1.2 \$1.8 \$1.6 \$2.3 \$2.8 \$2.6 Inflation 6% 4% 5% 3% 1% Change in Real GDP 3% -2% 2% 1% -1% Use the information in the table to generate sales forecasts for Years 0 and 1 by the following approaches. a. Extrapolation based on nominal percentage growth rates of sales. b. Extrapolation based on real percentage growth rates in sales. Inflation for Years 0 and 1 is forecasted to be 2 percent. c. Extrapolation applied to nominal sales, with greater weight on the more recent data. d. Extrapolation based on the relationship between the real sales growth rate and the annual change in real GDP. The forecast of real GDP growth for Year 0 is 1.5 percent and for Year 1 is 2.0 percent.

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e. Based only on the information in the table and the results of your calculations, which approach do you think will do the best job of forecasting sales for this venture? Why? 3. Consider the following pattern of historical sales growth rates of a venture that began operation seven years ago: Year -6 Year -5 Year -4 Year -3 Year -2 Year -1 Sales Growth (%) 223% 127% 174% 59% 90% 43% a. Use exponential smoothing to derive year-zero sales growth forecasts. Consider some values of α between 0.2 and 0.8 and generate forecasts for growth from Year –1 to Year 0.
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