Chapter 6 Prospective Analysis: Forecasting

Question 1

Who needs forecasts?

1. ______need to forecasts to formulate business plans and provide performance targets
2. ____________ need forecasts to help communicate their views of the firm’s prospects to investors
3. _________ and debt market participants need forecasts to assess the likelihood of loan repayment

Answer 1

1. Managers
2. Analysts
3. Bankers

Question 2

Strategy, accounting, and financial performance analyses provide valuable information that help to shape _____ assumptions.

(For example, for breakthrough technologies, business alliances, and business line expansions.)

Answer 2

forecast

Question 3

Forecasts of future performance should be ______, including important financial statement items

(a comprehensive approach is useful because it guards against unrealistic implicit assumptions)

Answer 3

comprehensive

Question 4

True or false?

An analyst forecasts growth in sales and earnings for several years without explicitly considering the required increases in working capital and plan assets and the associated financing, the forecast might possibly imbed REASONABLE assumptions about asset turnover, leverage, or equity capital infusions

Answer 4

FALSE

For example, if an analyst forecasts growth in sales and earnings for several years without explicitly considering the required increases in working capital and plan assets and the associated financing, the forecast might possibly imbed UNREASONABLE assumptions about asset turnover, leverage, or equity capital infusions

Question 5

The most practical approach is to focus on projecting _________financial statements rather than to project detailed line items

Answer 5

CONDENSED

Question 6

A condensed income statement includes:

1. ____ (the #1 driver!!!!!!)
2. Net operating profits after tax _____
3. Net _____ ______ after tax
4. Taxes
5. Net income

Answer 6

1. SALES
2. NOPAT
3. interest expense
4. Taxes
5. Net income

Question 7

A condensed balance sheet consists of:

1. •Net operating ____ _____
2. Net long-term _______
3. Net ____
4. ____

Answer 7

1. working capital
2. assets
3. debt
4. equity

Question 8

Typically, estimating future _______ is the critical first step in arriving at forecasted financial statement information.

Answer 8

SALES

Question 9

On a condensed Balance Sheet, the

Net operating ________ = Net ______

Answer 9

Net operating assets = Net capital

Question 10

1. _____performance may be used to understand the behavior of key measure such as sales or earnings
2. Studying ____ time series of measures such as earnings can provide insights into trends for future performance
3. Measures from ____ periods provide benchmarks to compare forecasts against

Answer 10

1. Past
2. past
3. prior

Question 11

Sales growth tends to be ______-________ (coverge toward the mean)

(graph show a converging pattern, because high achievers will likely slow down, and low achievers will likely catch up)

Answer 11

mean-reverting

Question 12

Sales growth rates tend to be “mean-reverting”: firms with above-average or below-average rates of sales growth tend to revert over time to a “normal” level (historically ___% to ___% for US firms) within ___ to _____ years

Answer 12

7-9%

three to ten years

Question 13

TRUE OR FALSE

Even when a firm is growing rapidly at present, it is generally unrealistic to assume that the current high growth will persist indefinitely.

Answer 13

TRUE

Question 14

As industries and companies mature, their growth rate slows down due to demand _____ and intra-industry ________

Answer 14

SATURATION

COMPETITION

Question 15

ROE is also ____-_____

Answer 15

mean-reverting

Question 16

ROE behavior is dependent on both ____ and the ____ base.

Answer 16

equity

asset

Question 17

ROE = Operating _____

Answer 17

ROA

Question 18

REFERENCING ROE COMPONENT IN GRAPHS

Profit margins and ROEs tend to be driven by ______ to normal levels over time

Answer 18

competition

Question 19

REFERENCING GRAPHS FOR ROE COMPONENTS

In contrast to rates of return and margins, it is reasonable to assume that asset turnover, financial leverage, and net interest rate remain relatively stable over time (unless there is an explicit change in _______ or ________ policy being contemplated for future periods)

Answer 19

TECHNOLOGY

FINANCIAL

Question 20

___________conditions should also be considered when making forecasts (e.g., consumer confidence, interest rates, oil price, inflation, etc.)

Answer 20

MACROECONOMIC

Question 21

__________ conditions are difficult to predict in the short term, and thus it is advisable to assume the effect will even out in the long term.

Answer 21

MACROECONOMIC

Question 22

FORECASTING CONSIDERATIONS

1. use “_______ behavior” as the baseline; graphs on slides
2. incorporate “other ________”
3. “________” forecastS

Answer 22

PERFORMANCE

CONSIDERATIONS

DEVELOP

Question 23

The _______ forecast is the most crucial estimate in the forecasting process because other income statement and balance sheet accounts derive, either directly or indirectly, from the sales forecast.

Answer 23

SALES

Question 24

Formula for sales forecasts:

_______growth rate = (Sales – Prior Year’s Sales)/Prior Year’s Sales

________ revenues = Actual revenues * (1+Sales growth rate in %)

Answer 24

sales

forecasted

Question 25

When a firm has multiple segments, make separate sales growth forecasts for each segment and then take a ______average growth rate

(89% of sales come from the US/Canadian segments, while only 11% comes from the European market)

Answer 25

weighted

Question 26

•Competitive pressures will lead to a steady decline in _____ margins over time

Answer 26

NOPAT

Question 27

What are primary drivers of operating working capital?

• Day’s accounts _______
• _______turnover
• Day’s accounts ________

Answer 27

RECIEVABLE

INVENTORY

PAYABLE

Question 28

Developing a Long-Term Assets to Sales Forecast

Net long-term assets typically consist of Plant, Property, and Equipment (______) and intangible assets

Answer 28

PPE

Question 29

Developing a Capital Structure Forecast

A company’s capital structure would typically be expected to remain constant, simply because management policies on capital structure are _______ to change

Answer 29

SLOW

Question 30

Seasonality and Interim forecasts, aka _____ forecasts, are always based the quarter from the same quarter of the previous year.

(Always base the quarter from the same quarter of the previous year, to take into account seasonality)

Answer 30

quarterly

Question 31

1. An asset write-down – will ________ affect future income (damage to building bec. Of hurricane, it causes money to rebuild and production will be negatively affected; inventory is another example as well, like an older model of an iphone that is no longer in demand); these are typically physical assets
2. A merger or acquisition It depends…it will be ______if the companies have synergies; but if the companies are not related or all, this will affect forecasts _______.
3. The sale of a major division if the division is losing money, it will be ______ forecast; and visa versa
4. The initiation of dividend payments; forecasts will be ______; this is not an expense, it only reduces retained earnings; sends a good message to capital participants that it has a lot of free cash flow; financially healthy companies initiate a dividend payment

Answer 31

1, negatively

2. positive; negatively
3. positive
4. positive

Question 32

(CONCLUDING SLIDE)

1. _______ is the first step in prospective analysis of firm performance.
2. Preliminary business strategy, accounting, and financial analysis should form the basis for many assumptions used in _______.
3. ________should be comprehensive and include key elements of the financial statements.
4. When forecasting, the _____ series behavior of various statistics should be kept in mind.

Answer 32

1. FORECASTING
2. FORECASTING
3. FORECASTS
4. TIME