EQUITY MODULE 45

Question 1

45.1 Where does forecasting fit with the general analysts’ job?

Answer 1

Question 2

45.1 What are forecast approaches? What do they focus on?

Answer 2

Question 3

45.1 Forecasting revenue: top down analysis:

Answer 3

Question 4

45.1 Forecasting revenue: bottom-up analysis

Answer 4

Question 5

45.1 Forecasting revenue: hybrid approach:

Answer 5

companies both top down and bottom up

Question 6

45.1 Forecasting operating expenses: COGS

Answer 6

Question 7

45.1 Forecasting operating expenses: SG&A expenses:

Answer 7

Question 8

45.1 working capital: How are these forecasts made?

What is WC comprised of?

Answer 8

Question 9

45.1 How can we take the number of days for DSO, DOH for example, and turn it into a turnover figure? (to understand how many times the inventory, for example, is turned over during the year)

Answer 9

flip it over and don’t multiply by 365

Question 10

45.1 Given this example - describe the process for calculation

Answer 10

calculate DSO, DOH, and DPO (and turnover values for each if you like)

To get to the attached.

video was really good! go to 12 mins

Question 11

45.1 How can we forecast capital investments, depreciation, the value of future asset purchases, and capital structure?

Answer 11

Question 12

45.1 What is scenario analysis?

Answer 12

Question 13

45.1 Which approach is most appropriate for an analyst to use to forecast revenues for a company in a highly cyclical industry?

Answer 13

An analyst’s discretionary forecast is most frequently used for companies in cyclical industries as well as companies that have few or no peers, those that do not provide management guidance, and those in the midst of a significant business transition.

Question 14

45.1 What is an example of a summary measure?

Answer 14

Free cash flow is an example of a summary measure as it combines several measures into one (e.g., net income, depreciation expense, fixed capital investment).

Question 15

45.1 In creating a forecast for capital spending devoted to maintenance projects, an analyst will often start her analysis by looking at a company’s:

Answer 15

historical depreciation expenses in prior years.

Historical depreciation expense gives an analyst an idea of how old the current asset infrastructure is, and what maintenance and replacements may need to be made.

Question 16

45.1 Forecasting a fixed growth rate is most appropriate for estimating:

Answer 16

administrative expenses

General and administrative expenses are often more fixed than variable and can be modeled using a fixed growth rate that includes expected inflation.

Question 17

45.1 An analyst is most likely to forecast summary measures for a company, rather than forecasting specific financial statement items, when:

Answer 17

summary measures are relatively stable over time.

Question 18

45.1 Based on growth strategies outlined by the company’s CEO, an analyst forecasts overall growth of 5%. With inflation forecasted by economists at 3%, an analyst will likely forecast capital expenditures related to maintenance to grow by what percentage next year?

Answer 18

3%