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Chapter 10
Chapter 10
Chapter 10
Chapter 10
Chapter 10
Chapter 10
Chapter 10
Chapter 10
Chapter 10
Chapter 10
Chapter 10
Chapter 10
Chapter 10
Chapter 10
Chapter 10
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Chapter 10

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    • 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. 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
    • 3. 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
    • 4. 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
    • 5. 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
    • 6. Six Steps (cont.)
      • Time spent on assumptions most important!
      • Incorporate:
      • industry factors
      • economic conditions/predictions
      • risk factors inherent in firm’s strategy
    • 7. 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
    • 8. 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
    • 9. Step 3: Project Assets
      • Cash and marketable securities
      • Accounts receivable
      • Inventories
      • Other Current Assets
      • Investments in Unconsolidated Affiliates
      • Property, Plant, and Equipment
      • Other Assets
    • 10. 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
    • 11. 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)
    • 12. 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
    • 13. 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
    • 14. Now What?
      • Make sure financial statements “articulate”
      • Recalculate where needed
      • Analysis
        • Ratios
        • Common-size
        • Make sure assumptions are consistent
      • Sensitivity analysis
    • 15. 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

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