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CH.6 PROSPECTIVE ANALYSIS: FORECASTING

CH.6 PROSPECTIVE ANALYSIS: FORECASTING. The Techniques of Forecasting. The Overall Structure of Forecasts Do it comprehensively Involve many forecasts Key “drivers”: sales, profit margin Focus on projecting “condensed” financial statements. The Techniques of Forecasting (Cont’d).

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CH.6 PROSPECTIVE ANALYSIS: FORECASTING

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  1. CH.6PROSPECTIVE ANALYSIS: FORECASTING

  2. The Techniques of Forecasting • The Overall Structure of Forecasts • Do it comprehensively • Involve many forecasts • Key “drivers”: sales, profit margin • Focus on projecting “condensed” financial statements

  3. The Techniques of Forecasting (Cont’d) • Getting started: Points of Departure • Last year performance, last year performance adjusted with recent trends, average performance over several prior years • The behavior of sales growth: mean reverting • The behavior of earnings: random walk • The behavior of ROE: mean reverting • The behavior of components of ROE • Operating asset turnover, net financial leverage: stable • NOPAT margin and spread: most variable

  4. Making Forecasts • Table 6-1: forecasting assumptions • Table 6-2: forecasted income statements and balance sheet

  5. Sensitivity Analysis • Seasonality and Interim Forecasts • Can not focus only on performance of the most recent quarter, but also the performance of the comparable quarter of the prior year

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