Multiyear forecasting of financial s mid module

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Forecasts 11-31 Multiyear Forecasting of Financial Statements 11-31 Mid-Module Review 11-34 Parsimonious Multiyear Forecasting 11-35 Parsimonious Method for Forecasting 11-36 Multiyear Forecasting with Parsimonious Method 11-36 Analyzing Global Reports 11-37 Module-End Review 11-37 Appendix 11A: Morgan Stanley's Forecast Report on Procter & Gamble 11-37 Discussion Questions 11-52 Mini Exercises 11-52 Exercises 11-55 Problems 11-63 Discussion Points 11-70 Solutions to Review Problems 11-72
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2. Identify and explain the four financial statements, and define the accounting equation. (p. 1-10) 5. Describe the accounting principles and regulations that frame financial statements. (p. 1-27) or- mm m::D Oz ~- _z <g m en 1. Identify and discuss the users and suppliers of financial statement information. (p. 1-6) 4. Explain and apply the basics of profitability analysis. (p. 1-21) 3. Describe business analysis within the context of a competitive environment. (p. 1-15)
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MOD U L E ramework for Analysis and Valuation erkshire Hathaway owns numerous businesses that pursue diverse activities. The legendary Warren Buffett, the "Sage of Omaha," manages the company. Buffett's investment philosophy is to acquire and hold companies over the long ::.n His acquisition criteria, taken from Berkshire Hathaway's annual report, follow: --- ---~ ---~ :=l BERKSHIRE HATH""vv"", I 1. Large purchases (and large pretax earnings). 2. Demonstrated consistent earning power (future projections are of no interest to us, nor are 'turnaround' situations). 3. Businesses earning good returns on equity while employing little or no debt. Management in place (we can't supply it). Simple businesses (if there's lots of technology, we won't understand it). An offering price (we don't want to waste our time or that of the seller by talking, even preliminarily, about a transac- tion when price is unknown). -~ east three of Buffett's six criteria relate to financial performance. First, he seeks businesses with large and consistent ing power. Buffett is not only looking for consistent earnings, but earnings that are measured according to accounting ies that closely mirror the underlying economic performance of the business. Second, Buffett focuses on "businesses earning good returns on equity," defined as income divided by average stockhold- """,' equity: "Our preference would be to reach our goal by directly owning a diversified group of businesses that generate cash consistently earn above-average returns" (Berkshire Hathaway annual report). For management to earn a good return on . ,it must focus on both income (financial performance) and equity (financial condition). Third, Buffett values companies based on their ability to generate consistent earnings and cash. He focuses on intrinsic - e, which he defines in each annual report as follows: Intrinsic value is an all-important conceptthat offers the only logical approachto evaluatingthe relative attractivenessof investments and businesses.Intrinsic value can be definedsimply: It is the discountedvalue of the cashthat can be taken out of a businessduring its remaining life.
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