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Chapter 10
 

Chapter 10

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Chapter 10 Chapter 10 Presentation Transcript

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