Financial Reporting, Financial Statement Analysis, and Valuation: A Strategic Perspective Sixth Edition Stickney/Brown/Wah...
Forecasting Financial Statements <ul><li>Forecasting Skills </li></ul><ul><li>Necessary step in process of valuation </li>...
General Forecasting Principles <ul><li>Provide objective and realistic expectations </li></ul><ul><ul><li>Neither conserva...
Six-Step Framework <ul><li>Project revenues </li></ul><ul><li>Project operating expenses and operating income </li></ul><u...
Six Steps  (cont.) <ul><li>Steps are interdependent! </li></ul><ul><li>Pro formas must ARTICULATE </li></ul><ul><ul><li>Th...
Six Steps  (cont.) <ul><li>Time spent on assumptions most important! </li></ul><ul><li>Incorporate:  </li></ul><ul><li>ind...
Step 1:   Projecting Revenues <ul><li>Start with principal business activities </li></ul><ul><li>Sales – involves both pri...
Step 2: Projecting Operating Expenses <ul><li>Fixed vs. variable components </li></ul><ul><ul><li>Does cost change proport...
Step 3:  Project Assets <ul><li>Cash and marketable securities </li></ul><ul><li>Accounts receivable </li></ul><ul><li>Inv...
Step 4:  Project Liabilities and Shareholders’ Equity <ul><li>Accounts Payable </li></ul><ul><li>Other Current Liabilities...
Step 4 (continued) <ul><ul><li>Preferred Stock and Minority Interest </li></ul></ul><ul><ul><li>Common Stock and Additiona...
Step 5:  Project Interest Expense/Income, etc. <ul><li>Interest Expense </li></ul><ul><li>Interest Income </li></ul><ul><l...
Step 6:  Project  Statement of Cash Flows <ul><li>Using amounts from projected income statement and balance sheet: </li></...
Now What? <ul><li>Make sure financial statements “articulate” </li></ul><ul><li>Recalculate where needed </li></ul><ul><li...
Shortcut Approaches <ul><li>Firm is stable and mature </li></ul><ul><li>Industry is “steady-state” </li></ul><ul><li>Proje...
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Chapter 10

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  • Chapter 10

    1. 1. Financial Reporting, Financial Statement Analysis, and Valuation: A Strategic Perspective Sixth Edition Stickney/Brown/Wahlen Copyright © 2007 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. Chapter 10 Forecasting Financial Statements Slides Prepared by Karen Foust Tulane University
    2. 2. Forecasting Financial Statements <ul><li>Forecasting Skills </li></ul><ul><li>Necessary step in process of valuation </li></ul><ul><li>Six-step Framework </li></ul><ul><li>Process “builds” pro forma financial statements </li></ul><ul><li>Using Business and Strategic Factors in Forecasting </li></ul><ul><li>Shortcut Forecasting Techniques </li></ul><ul><li>When and how to use </li></ul><ul><li>Forecast Models </li></ul>
    3. 3. General Forecasting Principles <ul><li>Provide objective and realistic expectations </li></ul><ul><ul><li>Neither conservative nor optimistic—unbiased </li></ul></ul><ul><li>Comprehensive </li></ul><ul><ul><li>Include ALL expected future activities </li></ul></ul><ul><li>Based on internally consistent assumptions </li></ul><ul><li>Based on externally valid assumptions </li></ul><ul><ul><li>Reality check </li></ul></ul><ul><ul><li>What analyst thinks firm will ACTUALLY DO </li></ul></ul>
    4. 4. Six-Step Framework <ul><li>Project revenues </li></ul><ul><li>Project operating expenses and operating income </li></ul><ul><li>Project operating assets and liabilities </li></ul><ul><li>Project financial capital structure </li></ul><ul><li>Calculate cost of financing above—project net income </li></ul><ul><li>Project statement of cash flows </li></ul>
    5. 5. Six Steps (cont.) <ul><li>Steps are interdependent! </li></ul><ul><li>Pro formas must ARTICULATE </li></ul><ul><ul><li>The 3 financial statements must tie together </li></ul></ul><ul><li>Preparation will require several iterations </li></ul><ul><ul><li>May want to use a “clearing” account </li></ul></ul><ul><li>Quality will depend on assumptions! </li></ul><ul><ul><li>Financial statements will be no better than these </li></ul></ul><ul><li>Should perform sensitivity analysis </li></ul><ul><ul><li>Easiest if set up spreadsheet </li></ul></ul>
    6. 6. Six Steps (cont.) <ul><li>Time spent on assumptions most important! </li></ul><ul><li>Incorporate: </li></ul><ul><li>industry factors </li></ul><ul><li>economic conditions/predictions </li></ul><ul><li>risk factors inherent in firm’s strategy </li></ul>
    7. 7. Step 1: Projecting Revenues <ul><li>Start with principal business activities </li></ul><ul><li>Sales – involves both price AND volume </li></ul><ul><ul><li>Industry conditions </li></ul></ul><ul><ul><ul><li>Cyclical industries </li></ul></ul></ul><ul><ul><ul><li>Technological advances </li></ul></ul></ul><ul><ul><li>Economic conditions </li></ul></ul><ul><ul><li>Exchange rates </li></ul></ul><ul><ul><li>Segments </li></ul></ul><ul><li>Other revenues </li></ul>
    8. 8. Step 2: Projecting Operating Expenses <ul><li>Fixed vs. variable components </li></ul><ul><ul><li>Does cost change proportionately to sales? </li></ul></ul><ul><ul><li>Careful of “relevant range” </li></ul></ul><ul><ul><li>Industry knowledge important here </li></ul></ul><ul><li>Cost of goods sold </li></ul><ul><ul><li>Analyze by segment </li></ul></ul><ul><li>Selling and administrative expenses </li></ul><ul><li>Other operating expenses </li></ul>
    9. 9. Step 3: Project Assets <ul><li>Cash and marketable securities </li></ul><ul><li>Accounts receivable </li></ul><ul><li>Inventories </li></ul><ul><li>Other Current Assets </li></ul><ul><li>Investments in Unconsolidated Affiliates </li></ul><ul><li>Property, Plant, and Equipment </li></ul><ul><li>Other Assets </li></ul>
    10. 10. Step 4: Project Liabilities and Shareholders’ Equity <ul><li>Accounts Payable </li></ul><ul><li>Other Current Liabilities </li></ul><ul><li>Short-term Borrowings </li></ul><ul><li>Long-Term Debt and current maturities </li></ul><ul><li>Deferred Income Taxes </li></ul><ul><li>Other Noncurrent Liabilities </li></ul>
    11. 11. Step 4 (continued) <ul><ul><li>Preferred Stock and Minority Interest </li></ul></ul><ul><ul><li>Common Stock and Additional Paid-in Capital </li></ul></ul><ul><ul><li>Accumulated Other Comprehensive Income </li></ul></ul><ul><ul><li>Other Equity Adjustments </li></ul></ul><ul><ul><li>Treasury Stock </li></ul></ul><ul><ul><li>Note that retained earnings will be projected via the income statement (projections of net income as well as dividend payments) </li></ul></ul>
    12. 12. Step 5: Project Interest Expense/Income, etc. <ul><li>Interest Expense </li></ul><ul><li>Interest Income </li></ul><ul><li>Income Taxes </li></ul><ul><li>Net Income </li></ul><ul><li>Retained Earnings </li></ul><ul><ul><li>Dividends to preferred shareholders </li></ul></ul><ul><ul><li>Dividends to common shareholders </li></ul></ul><ul><li>Balance the Balance Sheet </li></ul>
    13. 13. Step 6: Project Statement of Cash Flows <ul><li>Using amounts from projected income statement and balance sheet: </li></ul><ul><li>Project operating cash flows </li></ul><ul><ul><li>Net income </li></ul></ul><ul><ul><li>Noncash expenses </li></ul></ul><ul><ul><li>Changes in operating assets and liabilities </li></ul></ul><ul><li>Project investing cash flows </li></ul><ul><li>Project financing cash flows </li></ul>
    14. 14. Now What? <ul><li>Make sure financial statements “articulate” </li></ul><ul><li>Recalculate where needed </li></ul><ul><li>Analysis </li></ul><ul><ul><li>Ratios </li></ul></ul><ul><ul><li>Common-size </li></ul></ul><ul><ul><li>Make sure assumptions are consistent </li></ul></ul><ul><li>Sensitivity analysis </li></ul>
    15. 15. Shortcut Approaches <ul><li>Firm is stable and mature </li></ul><ul><li>Industry is “steady-state” </li></ul><ul><li>Projected Sales and Income </li></ul><ul><ul><li>Use recent sales growth rate </li></ul></ul><ul><ul><li>Use recent profit margin </li></ul></ul><ul><li>Projected Total Assets </li></ul><ul><ul><li>Use historical asset growth rate </li></ul></ul><ul><ul><li>OR link sales growth and asset growth by using total asset turnover rate </li></ul></ul><ul><ul><li>Then use common-size balance sheet percentages </li></ul></ul>

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