B forecast a company’s future net income and cash flow;

Question 1

What does a forecast of future net income and cash flow often begin with?

Answer 1

A forecast of future net income and cash flow often begins with a forecast of future sales

Question 2

Forecasting sales approaches

Answer 2

Shorter Horizon - top down approach: Begin with a forecast of GDP growth. Use historical relationships to estimate the relationship between GDP growth and the growth of industry sales

Question 3

Simple Forecasting Model

Answer 3

Use some historical average or trend-adjusted measure of profitability (operating margin, EBT margin, or net margin) to forecast earnings.

Question 4

Complex Forecasting Models

Answer 4

Estimate each item on an income statement and balance sheet based on separate assumptions about its growth in relation to revenue growth.

Question 5

Multi-Period forecasts

Answer 5

Employ a single estimate of sales growth at some point that is expected to continue indefinitely.

Question 6

To estimate CF’s

Answer 6

Make assumptions about future sources and uses of cash (most important are assumptions about increases in working capital, capital expenditures on new fixed assests, issuance or repayments of debt, issuance or repurchase of stock.

Typical assumption: Noncash working capital as a % of sales remains constant

Question 7

First-pass model (CF estimate)

Answer 7

Indicates the need for cash in future periods - include a projection of necessary borrowing in future periods.