Module 30.1 Forecasting Flashcards
What does a forecast of future net income and cash flow begin with?
forecast of future sales.
What is the top down method of forecasting sales? is it used in the short term or long term?
begins with forecast of GDP growth, often supplied by outside research or an inhouse economics group. Used in the short term.
If market share is expected to be the same, then the growth will equal the growth in industry sales.
How is profitability determined in a forecast model?
historical average or trend-adjusted measure can be used to forecast earnings.
What are the most important assumptions an analyst has to make?
1) increases in working capital
2) capital expenditures on new assets
3) issuance and repayments of new debt
4) issuance or repurchase of stock
What are the three “C’s” of credit analysis?
Character, Collateral, and Capacity to repay.
Character - management professional reputation
Collateral - firms ability to pledge specific collateral
Capacity to repay - requires detailed analysis of fin statements.
What are the four categories credit rating agencies use to determine worthiness?
scale and diversification - larger companies with variety of products are less risky
operational efficiency - high margins and efficiency is less risky
Margin stability - less variable earnings is better for earnings
Leverage - measure of FCF to interest expense or total debt make up the most important part of the credit formula.
What is backtesting?
refers to using a specific set of criteria to screen historical data to determine how portfolios base don those criteria would have performed.
What is the price to tangible book value?
removes both goodwill and intangible assets from equity to get tangible book value.
What would a shift to premium, rather than commodity like products show in the financial statements?
an increase in gross margins greater than the increase in operating margins.
