Forecasting + Valuation Example
Note: The best forecasts are built on solid assumptions; you improve your assumptions the more you know the business and its history.
**As discussed in class, you are only required to estimate total assets and equity (book value). So if you choose, you can ignore forecasting the above listed asset/liability categories based on projected sales and simply forecast total assets in aggregate.
Financial Reporting: Financial Statement Analysis, Forecasting & Valuation
Select a U.S. public company and obtain electronically the annual financial statements (e.g. 10-K filings) for that company for the most recent three fiscal years. You will need at least two different annual filings to obtain all of the required financial statement information). Note: You do not need to print these financial statements, although you may find it helpful to print certain sections to assist in responding to the questions (e.g. the four financial statements, certain footnotes, business summary, segment information, MD&A, etc.).
It would be beneficial for you to select a company with which you have some level of understanding and for which the required financial data required to complete this group project is available for at least three years. I encourage you to read all the requirements (next page) before finalizing your company selection, so you can be confident you will be able to fulfill all of the requirements in a capable manner with the company you are choosing.
[10 points – Section One: Background Information]: (a) Which company did you choose? (b) Provide a brief introduction to your company, which should include the following elements: (1) presenting its background/history; (2) describing its primary line(s) of business;
(3) identifying the industry in which it operates and providing a brief overview of the industry;
(4) listing some of its closest competitors and providing basic financial data to offer some perspective into these companies’ operations;
(5).explaining some of the key economic, demographic, cultural, and/or political trends that present both opportunities and threats for your selected company in the years ahead.
[20 points – Section Two: Financial Statements]: Prepare the following
financial statement schedules:
a. Summary balance sheet information for a minimum of three years for your company and at least one competitor. Include common size ratios as part of this schedule in an
b. Summary income statement information for a minimum of three years for
your chosen company and at least one competitor. Include year-over-year
and cumulative average growth rates for each income statement line item in an appropriate format as well as appropriate common size ratios for each
year of information provided.
3. Please be sure to include appropriate headers for each of the statements, and take care to preserve formatting to ensure the financial statements are easily readable.
Relative to each of the financial statements, provide a succinct written evaluation of the company’s change in financial position (or performance) over the years presented (e.g. time-series) and relative to the selected competitor(s) (e.g., crosssectional).
[30 points – Section Three: Financial Ratios]: Calculate the following ratios based on the financial statement information provided in Section Two for a minimum of three years and comparable ratios for at least one competitor( note: you may need to obtain additional financial information to calculate the earliest ratios, especially those that include an “average”):
a. Profitability ratios (five total): return on a ssets, return on common equity, profit margin, gross profit margin, free cash flow over sales
b. Activity ratios (five total): asset turnover, inventory turnover, accounts receivable turnover, days inventory held, days sales outstanding (A/R)
c. Short-Term Liquidity (two total): current ratio, quick ratio
d. Long-Term Liquidity (three total): long-term debt-to-assets, operating cash flow to total liabilities, interest coverage For each of the above ratio categories (e.g. profitability ratios, activity ratios, etc.), provide a succinct written summary evaluating the company’s financial position (or performance) in the current year as compared to the previous years (time-series) and relative to the selected competitor(s) performance (cross- sectional).
4. [30 points – Section Four: Forecasting]: Using the financial statement trends
you highlighted above and additional financial information from the most recent
10-K as necessary, forecast the company’s earnings (income statement) for a
minimum of three years. In addition, forecast operating cash flows, free cash
flows, total assets and book value (assets – liabilities) for each of the three
forecasted years. Hint: using disaggregated segment and/or product line
information will allow for more accurate forecasting. Provide a brief written
summary, which outlines your forecasting assumptions.
5. [10 points – Section Five: Valuation]: Using the forecasts completed in the preceding section, estimate the company’s valuation using the discounted cash flows (DCF) approach. As a second valuation approach, use an appropriate P/E multiplier to estimate the future share prices of the company based on each of the three years’ forecasted earnings from Section Four. Provide a brief written statement explaining why you chose the corresponding P/E ratio(s) and discount rate(s) used in these valuation analyses. In addition, provide a recommendation (buy, hold, sell) based on the calculated equity valuation.Download Questions
Microsoft Corporation Limited Valuation Calculations Discounted Free Cash Flows and Earnings Based Valuations
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