Week 7 - Forecasting

Question 1

why is forecasting impornat

Answer 1

Managers can use forecasts to set targets for future performance and also to make
decisions about and help plan future purchases of assets, sources of financing etc.

Creditors make forecasts to determine whether their debtors can repay.

Investment bankers can make forecasts pertaining to firms or divisions of firms
which they think are potential takeover targets.

Analysts make forecasts to communicate their view of a firm’s future prospects.
The forecast is a critical input into the valuation process, which tries to determine what the “correct” price of a security should be

Question 2

What is the goals for forecasting

Answer 2

• produce unbiased estimates of future earnings
• the best forecasts are comprehensive and internally consistent forecasts
• forecasts should pass the common sense tests

Question 3

what are the steps to forecasting

Answer 3

1. adjust financial states by identify and eliminate transitory items
2. start by forecasting revenue

Question 4

how do you forecast sales growth

Answer 4

Top down:
1. forecast macroeconomic data
2. then forecast industry data
3. then forecast firm-specific data

Bottom up:
- start at the product or segment level
- identifying the revenue drivers of an established business model

sales growth = (1 + growth rate in new assets) * (1+growth in sales per asset) -1

Question 5

what are the key takeaways for forecasting

Answer 5

• make comprehensive forecasting for both IS and BS
• focus on big stuff
• use revenue forecasts as an anchor for other line items

Question 6

forecasting income statement

Answer 6

• forecast revenue growth rate
• COGS and SG&A as a % of sales
• depreciation expense = beginning year PPE * estimated depreciation rate
• nonoperating expense - assume no change and adjust later
• one time items - not expected to recur = 0
• other nonoperating expenses - use 5-year average
• income tax - based on pretax income
• noncontrolling interest - no change in historic ratio

Question 7

forecasting balance sheet

Answer 7

• working capital accounts = as a % of sales
• PPE increase by estimated CAPEX
• intangible assets = subtract from forecasted amortization expense
• current and long term debt - look at contractual payments
• stockholders equity - expect no change in paid-in-capital
• retained earnings - forecasted by net income reduced by dividends

CAPEX = current year CAPEX/current year sales * forecasted sales

depreciation expense = current year depreciation / prior year PPE

forecasted dividends = current year dividends/current year net income * forecasted net income

• use cash as a plug to balance the BS