BU393 Ch.14
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Jan 9, 2024
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Ch. 14: Sales forecasting and Basic F/S Forecasting
-
Qualitative: market surveys, surveys of the sales force, exec. Opinion
-
Quantitative: times series method (ARMA models)
-
Associative forecast: based on the functional relationship between sales of the
product, and publicly observable value
How do we value?
-
Most used valuation approaches:
-
Relative valuation models:
-
price/earnings
-
market/book
-
Discounted cash flow (DCF) approach
-
DDM: dividend discount model
-
DFCF: Discounted free cash flow approach
DCF Model
1.
Sales forecast
2.
Forecast financial statements using the % of sales method (pro-form financial
statements)
3.
Based on pro-forma statements, estimate the company FCF
4.
Estimate the value of the company by discounting the estimated FCF, using the WACC
discount rate
From the basic model of sales:
Sales t = Pt x Qt
Where:
Pt: price at period t
Qt: quantity at period t
Forecasting model of sales: sales t+1= Pt+1 x Qt+1
Where:
Pt+1= Pt (1+g)
Qt+1= Qt (1+g)
Example:
Village Farms (VFF) is a North American greenhouse producer of tomatoes. VFF operates in an area of
220 acres. Last year (ended yesterday), VFF harvested 522,727 pounds per acre. VFF sold its output at an
average price of $1.1647 per pound.
It is expected that the prices per pound will increase by 32%. At the end of last year, VFF finished
installing a new technology that will increase yields this year to 880,000 pounds per acre. What will sales
revenues be this year?
Market share forecasting:
For multiproduct firms, the simplest sales model is based on forecasting market share:
Where the basic model of sales: Sales t = Isales t x mst
Where:
ISt= industry sales in period t
mst= company’s market share
Selected Financial Information
Lululemon Athletica
Year t – 1
Year t
Year t + 1
old stores
new
stores
total
Number of
stores
174
211
Area (square
feet)
2,834
2,834
2,834
2,834
Sales per
square foot
1,656
1,823
Total Sales (in
Millions)
816.6
1,090.1
We need forecast income statements and balance sheet accounts
3 types of accounts:
1.
Account that are tied to sales (proportion of sales)
2.
Accounts that are not tied to sales
3.
Plug accounts
Ex:
Forecast the financial statement for Bristol corporation for 2023, using the proportion of sales
methodology. For that, you will find the Financial statements of 2022 in the following slide and the
following assumptions:
Sales for 2023 are expected to increase by 9%
Depreciation rate: 6.28%
CAPEX for 2023: $1,000
Constant Goodwill of $800
Long term Debt for 2021: $5,777
Short term debt for 2021: $850. That value remains constant in the future.
Dividend ratio (historical): 50%
Use Common Stock as plug variable
Accounts that are tied to sales:
-
Proportion of sales (POS) method
-
Sales forecasts are used to generate forecasted statements
-
Almost every account is forecasted as a constant % of sales from previous
period
Accounts not tied to sales:
-
Interest
-
Depreciation
-
CAPEX
-
Net fixed assets, property, plant, equipment (PPE)
-
Dividends and retained earnings- forecasted by assuming the firms historical payout
ratio is constant
-
Apparent tax rate
Interest expense forecast
〖
Interest Expense
〗
_(t-1)=
〖
Total Debt
〗
_(t-2)×i
i=
〖
Interest expense
〗
_(t-1)/
〖
Total Debt
〗
_(t-2)
Ex: Forecast Interest expense for 2023 given that
Short and Long Debt 2021=$6,627
Short and Long Debt 2022=$7,127
Interest expense 2022 = 590
SOLUTION:
i = 590/6,627 = 8.9%
Interest expense 2023: 8.9%*7127=634.51
Depreciation expense, CAPEX, NFA
-
Depreciation expense uses the declining blaance depreciation system
-
Depreciaiiton = d*(Net t-1 + CAPEX)
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-
Where:
-
Net t-1 = net fixed assets or (PPE) in period t-1
-
CAPEX= purchases of fixed assets in period t
-
Capital asset identity:
-
Net t = net t-1 - depr. + CAPEX
Ex: Forecast Depreciation and Net fixed assets for 2023 given that:
d = 6.28%
CAPEX_2023 = $1000
Net_2022=$10,150
SOLUTION
Depr: 0.0628*(10150-1000)= 700.09
Capital asset identity:
Net2023= 10150-700.09+1000=10450
Plug account:
-
Incremental change (increase or decrease) in sales produce an unbalanced statement fo
assets and liabilities
-
This unbalance is fixed through “plug accounts”: debt or equity
-
Change in this plug account represents how the firm will finance the increment of assets
needed to support sales
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