BU393 Ch.14

docx

School

Western University *

*We aren’t endorsed by this school

Course

393

Subject

Finance

Date

Jan 9, 2024

Type

docx

Pages

4

Uploaded by ProfessorOxideButterfly181

Report
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)
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
- 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