...Lecture notes chapter 4 Financial Forecasting Author's Overview Developing pro forma statements is a fairly involved process. However, the rewards to students are high in terms of understanding the interaction of accounting data and financial forecasting. The development of pro forma financial statements is an integrative exercise, so there is little reward for a halfway approach. The percent-of-sales method, presented at the back of the chapter, is a second approach to financial forecasting. It has the virtue of being easily understood and quickly mastered, but it does not have the full validity of developing pro forma statements. It is really a matter of instructor preference. Chapter Concepts * Financial forecasting is essential to the strategic growth of the firm. * The three financial statements for forecasting are the pro forma income statement, the cash budget and the pro forma balance sheet. * The percent-of-sales method may also be used for forecasting on a less precise basis. * The various methods of forecasting enable the firm to determine the amount of new funds required in advance. * The process of forecasting forces the firm to consider seasonal and other effects on cash flow. Annotated Outline and Strategy I. Need for Financial Planning ...
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...Orrstown Financial Analysis Report -----Pro forma forecasting Contents 1 Intoduction 1 2 Balance Sheet Pro Forma 2 2.1 Asset Forecasting 2 2.2 Liabilities Forecasting 4 2.3 Equity 5 3 Income Statement Pro Forma 6 4 Statement of Cash Flow Pro Forma 11 5 Financial Ratios Pro Forma 12 Abstract Based on the former two analysis reports, this assignment focuses on forecasting financial statements for 2013-2017. Every subject in Balance Sheet, Income Statement, and Statement of Cash Flow is predicted by using pro forma analysis. Before that, several assumptions are made for the convenience of forecasting. Furthermore, financial ratios for the upcoming five years are also calculated with the numbers provided in the three pro forma financial statements. Key words: Pro forma, financial statements forecasting 1 Intoduction The method that is using in this assignment is called pro forma financial analysis. Pro forma is the forecast financial statements based on either anticipated future events or potentially changing business performance in upcoming periods. This is in contrast to regular financial statements that are financial summaries on a business's past. Businesses use pro forma statements to assist in their planning activities, both short term and long term. Normally, a pro forma forecasting will cover three to five years into the future; and five-year pro forma can provide a fuller view into how a business might fare under various assumptions. The...
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...Equity Valuation and Analysis – Lundholm & Sloan Chapter 1 - Introduction Focus of the Book – Equity Valuation Business Activities Operating Investing Financing Equity Valuation Theory Dividend Discounting Model o The value of an equity security is equal to the present value of the future cash flows that it will generate o Where Value0 = Value of equity at time 0 Cash Dividendt = expected amount of cash dividends to be paid in period t r = discount rate (cost of capital) Chapter 1 Equity Valuation and Analysis Page 1 of 5 o Modified Model o Where all from except Stock Repurchasest = expected amount of cash to be paid in period t Equity Issuancest = expected amount of cash to be raised via equity issuances in period t o Of course the challenge is the estimated of the amount and timing of the cash flows So where do financial statements fit into all of this? o Provide a record of the past operating, investing and financing decisions and their cash flow effects o Provide a beginning point for forecasting the future Chapter 1 Equity Valuation and Analysis Page 2 of 5 Equity Analysis Process Step 1 - Understading the Past Step 2- Forecasting the Future Step 3 - Valuation • Information Collection • Understanidng the Business • Accounting Analysis • Financial Ratio Analysis • Cash Flow Analysis • Structured Forecasting • Income Statement Forecasts • Balance Sheet Forecasts • Cash Flow Forecasts • Cost of Capital • Valuation Models •...
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...[1] I. Introduction This teaching note describes the valuation of publicly traded equity securities using the Discounted Cash Flow (DCF) and Price/Characteristic (market comparison) approaches, with a specific spreadsheet example for The Black and Decker Corporation. Free cash flow valuation and comparables (comps) are key tools in fundamental analysis, the process of picking stocks with high expected return based on an analysis of the company. In theory, buying stocks of companies that are undervalued in the stock market will produce high returns as other investors slowly realize the company’s true value and quoted share prices increase to match that value. Three basic ideas underlie the application of discounted cash flow (DCF) analysis. First, the value of a company is ultimately derived from the cash that can be extracted from that company, and more cash is preferred to less. Second, cash received in the future is not as valuable as cash received today. Third, risky cash flows are valued less than cash flows known with relative certainty. The process of valuing publicly traded equity using DCF involves three steps. First, condensed financial statements, also called pro-forma statements, are forecasted several years into the future. Second, the forecasted statements are used to calculate free cash flows for the entire firm, which are then discounted by the cost of capital for the firm. Third, the intrinsic value of one share of the common...
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...Guillermo Furniture Store and Pro Forma Analysis Guillermo Navellez, once the owner of the largest flourishing furniture store in Sonora, Mexico faces globalization and the emergence of foreign competition. Inexpensive labor and the abundance of timber in Sonora are major factors, which contributed to the manufacturing of the store’s furniture. Guillermo faces new competition that possesses advanced technology with the ability to manufacture faster and at lower costs. With the emergence of this sophisticated technology, the company requires change to cease the decease of revenue and sales (University of Phoenix, 2012). Guillermo hires Jevaloch Consulting Firm, Incorporated to examine his current business forecast and choose strategies in optimal working capital. Additionally, Jevaloch will also provide an efficient pro forma budget and recommend an implementation plan. Guillermo Furniture Forecast Forecasting is an important tool for estimating the future market value for the business. Jevaloch consultants began the examination of Guillermo Furniture by reviewing a six month Figure 1.1 Budget Sales Forecasts. Figure 1.2 Actual Sales Forecasts. projection of sales forecast for units of chairs, the top sales item for the store, sold from January to June 2010. Figures 1.1 and 1.2 are representative of the budget unit sales and actual unit sales for Guillermo Furniture. The average monthly demands for the budget sales is 18,014/6 = 3002.3 and 17,997/6 = 2999.5 for...
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...Chapter 09 Prospective Analysis Multiple Choice Questions 1. When preparing a projected income statement, which of the following additional information, other then the financial statements would probably not be relevant? A. The competitive environment B. New versus old store mix C. Expected capital expenditure D. Expected level of macroeconomic activity 2. The reliability of a short-term cash forecast depends most heavily on the quality of: A. Cost of goods sold forecast B. Current ratio forecast C. Sales forecast D. Shares outstanding forecast 3. What is the correct order of the following steps in preparing a projected income statement (not all steps may be shown)? I. Project future net sales II. Project future net income III. Project future cost of goods sold IV. Project future interest expense A. I, II, III, IV B. II, IV, III, I C. I, III, II, IV D. I, III, IV, II 4. What is the correct order of the following steps in preparing a projected balance sheet (not all steps may be shown)? I. Project future cash II. Project future accounts receivable III. Project future accounts payable IV. Project future property plant and equipment A. I, II, IV, III B. II, IV, III, I C. I, III, II, IV D. I, III, IV, II The treasurer of Simmons Corporation, a newly formed software company is trying to ascertain Simmons cash flows for the next three months. Expected sales are: 50% of sales are made for cash. Simmons expects to...
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...Papa Geo’s Restaurant Budget Proposal For [2014-2019] BUSN-278 [Term] Professor[name] DeVry University ------------------------------------------------- Table of Contents Section | Title | Subsection | Title | Page Number | 1.0 | Executive summary | | | | 2.0 | Sales Forecast | | | | | | 2.1 | Sales Forecast | | | | 2.2 | Methods and Assumptions | | 3.0 | Capital Expenditure Budget | | | | 4.0 | Investment Analysis | | | | | | 4.1 | Cash flows | | | | 4.2 | NPV Analysis | | | | 4.3 | Rate of Return Calculations | | | | 4.4 | Payback Period Calculations | | 5.0 | Pro Forma Financial Statements | | | | | | 5.1 | Pro Forma Income Statement | | | | 5.2 | Pro-Forma Cash flow Statement | | | | 5.3 | Pro-Forma Balance Sheets | | 6.0 | Works Cited | | | | 7.0 | Appendices | | | | | | 7.1 | Appendix 1: [description] | | | | 7.2 | Appendix 2: [description] etc | | * 1.0 Executive Summary 1.0 Executive Summary * Papa Geo’s an Italian restaurant will be a start up business which will be located in Orland, Florida. The restaurant will have strong emphasis on quality and will work on low cost strategy which will help in attracting more and more consumers across the place. Being located in the heart of the city and its value pricing strategy, the company will be able to attract the large junk of consumers. The company will not compete with the established international brands but will make its own image with...
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...M&A Project Table of Contents 1. Executive Summary 1 2. Introduction 2 2.1. History 2 2.2. Company structure 3 2.3. Products 4 2.4. Stock analysis 4 2.5. Competitors 5 2.6. Industry and Economic Trends Analysis 6 3. SWOT Analysis 7 4. Valuation 11 4.1. Weighted Average Cost of Capital 11 4.1.1. Re: Cost of Equity 12 4.1.2. Rd * (1-Tc): Cost of Debt 14 4.2. Pro Forma Forecasting 16 4.3. Discounted Cash Flow Valuation 19 4.4 Earning Valuation 21 4.5 Relative P/E Ratio Model 23 4.6 Synergy 26 5. Outcome and process of negotiations 28 6. References 30 7. Appendices 31 Executive Summary The purpose of this paper is to evaluate and negotiate an acquisition of Jos. A Bank by Men’s Wearhouse. The first step of this process is to use fundamental analysis to value the equity per share value of Jos. A Bank. The second step is to value the synergy between Men’s Wearhouse and Jos. A Bank to estimate the value that would be added to Men’s Wearhouse if they were to acquire Jos. A Bank. Lastly, the paper will address the process of the negotiation with Jos. A Bank management for the proposed acquisition and the ultimate outcome of the process. The North American Industry Classification System (NAICS) classifies Men’s Wearhouse as a clothing and clothing accessories store and this subsector of the retail industry has approximately 2.5 million employees. The firm was founded by George Zimmer in 1973 in...
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...ANALYSIS OF FIANANCIAL STATEMENT MUSTEHKAM CEMENT LIMITED PRESENTED TO: TAHSEEN MOHSIN PRESENTED BY: MUHAMMAD USMAN GHANI 105221003 (03454657966) PREFACE This is the project of financial statement analysis in which we have to apply the financial technique to doo the financial analysis in deep by firm comparability, by ding credit analysis, making pro forma statements and showing reality in it, we were asked to do long term solvency analysis, profitability analysis and valuation in which we have to calculate expected return through DDM and CAPM model. We do the analysis of whole firm in detail on its financial data, calculate the whole ratios of business through which we can analyze in which position the business is running and what problems are faced by the firm and is the firm having any financial risk or in case of solvency measure the firm has through which it can pay its obligations. The project was full of problem because to apply the financial technique we need financial data have to find out which element have to put in that formula and first time I have visit the KSE site to collect the previous stock price of share which was learning point for me that which place how you have to collect data have to do interpretation. ...
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...years, until the late 1990s that a new competitors joined the furniture business that has put a dent into Guillermo’s business. Competitors have new technology when to allow them to come in with lower prices and lure customers but Guillermo has to decide on the best options for the company either upgrade or move forward working as he did making quality products for customer’s expectation. In order for Guillermo to improve his company, Guillermo has to seek other alternatives and make financial decisions to increase sales to make profits. The contents of the paper will examining Sensitivity Analysis, Weighted Average Cost of Capital (WACC), multiple valuation techniques in reducing risks, calculate NPV for future cash flows and work out pro forma cash flow budget for the next five years for the organization and analyze the companies projected earnings (UOP, 2009). Analysis of Different Alternatives Guillermo has three available alternatives to evaluate the furniture store. First alternative is to keep itself in the current position. The current managers use capital budgeting techniques to find the best project among the group of projects. Current budget for Guillermo is $42,577 net income before taxes could observe capital markets for just a short time to convince consumer the market rates are not at a constant. Guillermo has to pay his laborer the amount of $20 to $30 an hour including overtime to perform the amount of work necessary to have quality furniture...
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...Analysis of Financial Statements (MBA) Project Instructions Project writing is not a difficult task at all. However, it is an art by which the writer represents his point of view in a way that it looks professional, clear and comprehensive, and finally leaves a long lasting impression on the reader. Ethics of project writings: Project writing has some ethics which must have to be followed by the writer in order to make a professional project. Emphasis on these ethics will make you learn how to write a project in a professional manner. Ethics of project writing include making a main page, writing a preface, giving an acknowledgement, making a table of contents, putting executive summary, giving an introduction to the project, mentioning the contents of the project, concluding it, including all the tables and annexure, and finally writing a bibliography. What this project involves: The idea is to concentrate on doing a full analysis of one firm. Since I suspect that you may have other courses or jobs, what is required here is somewhat less than a full analytical workup. You will be applying some of the financial principles we have discussed in class. A comprehensive outline is given below to make the project. 1. Select a company of your choice as a first step and apply principles that are mentioned below. (I understand that some data will not be available for the firms. However, you have to assume missing figures based on your understanding and our class discussions...
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...candidates will learn in the CMA Canada Professional Programs. The starting point for solving a business problem is to analyze the current situation and identify the problems that need to be addressed. A major component of the situational analysis is to take a close look at the environments within which an organization finds itself. One of the methods commonly used in such an environmental analysis is “SWOT” (an acronym for Strengths, Weaknesses, Opportunities and Threats), which considers the strengths and weaknesses in the internal environment as well as the opportunities and threats in the external environment. Candidates can refer to the required reading Situational Analysis Tools mentioned below for more information on how to go about doing a SWOT analysis. The next major step is to identify the issues and analyze various alternatives for addressing the major issues. In this case, a shortage of available cash is a major issue and needs to be addressed. Therefore, one of the main topics for this assignment is cash flow management, i.e. managing the movement of money into and out of a business. Many supervisors and/or managers who oversee functions such as accounts receivable, accounts payable, and finance are directly involved in cash flow management within their organizations. In some smaller companies, a single individual may manage...
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...Chapter 4 Cash Flow and Financial Planning ( Instructor’s Resources Overview This chapter introduces the student to the financial planning process, with the emphasis on short-term (operating) financial planning and its two key components: cash planning and profit planning. Cash planning requires preparation of the cash budget, while profit planning involves preparation of a pro forma income statement and balance sheet. The text illustrates through example how these budgets and statements are developed. The weaknesses of the simplified approaches (judgmental and percent-of-sales methods) of pro forma statement preparation are outlined. The distinction between operating cash flow and free cash flow is presented and discussed. Current tax law regarding the depreciation of assets and the effect on cash flow are also described. The firm’s cash flow is analyzed through classification of sources and uses of cash. The student is guided in a step-by-step preparation of the statement of cash flows and the interpretation of this statement. This chapter ties in every person’s need to set goals, estimate income, and budget expenditures to the firm’s need to effectively engage in these activities. ( Answers to Review Questions 1. The first four classes of property specified by the MACRS system categorized by the length of the depreciation (recovery) period are called 3-, 5-, 7-, and 10-years property: |Recovery Period |Definition ...
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...Schweigert | | |FIN/200 | | |Introduction to Finance: Harvesting the Money Tree | Copyright © 2009, 2008, 2007 by University of Phoenix. All rights reserved. Course Description This course gives students an overview of finance concepts, terminology, and principles. It is an introduction to the role of finance in the business world. Topics covered include the relationship between finance and accounting, basic financial analysis and planning techniques, financial ratios, profit, cash flow, and sources of business financing. Policies Students/learners will be held responsible for understanding and adhering to all policies contained within the following two documents: • University policies: You must be logged into the student website to view this document. • Instructor policies: This document is posted in the Course Materials forum. University policies are subject to change. Be sure to read the policies at the beginning of each class. Policies may be slightly different depending on the modality in which you attend class. If you have recently changed modalities, read the policies governing your current class modality. Course Materials Block, B.B., Hirt, G.A., & Danielsen...
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...SOLUTIONS TO EXERCISES AND CASES For FINANCIAL STATEMENT ANALYSIS AND SECURITY VALUATION Stephen H. Penman Fifth Edition CHAPTER ONE Introduction to Investing and Valuation Exercises Drill Exercises E1.1. Calculating Enterprise Value This exercise tests the understanding of the basic value relation: Enterprise Value = Value of Debt + Value of Equity Enterprise Value = $600 + $1,200 million = $1,800 million (Enterprise value is also referred to as the value of the firm, and sometimes as the value of the operations.) E1.2. Calculating Value Per Share Rearranging the value relations, Equity Value = Enterprise Value – Value of Debt Equity Value = $2,700 - $900 million = $1,800 Value per share on 900 million shares = $1,800/900 = $2.00 E1.3 Buy or Sell? Value = $850 + $675 = $1,525 million Value per share = $1,525/25 = $61 Market price = $45 Therefore, BUY! Applications E1.4. Finding Information on the Internet: Dell Inc., General Motors, and Ford This is an exercise in discovery. The links on the book’s web site will help with the search. E1.5. Enterprise Market Value: General Mills and Hewlett-Packard a) General Mills | | | |Market value of the equity = $36.50 ( 644.8 million shares = ...
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