Los 45.a

Question 1

What are financial statement forecasts used for?

Answer 1

Valuation and investment recommendations

Question 2

What are Forecast objects?

Answer 2

These are each individual item of a companies financial statement that are put into four categories
Financial Statement Lines with Clear Drivers
Financial Statement items without clear drivers
Summary measures - e.g. EPS or free cash fllow (combining several line items)
Ad-hoc items - accounting for events a companies financial statement do not yet reflect etc contingent liabilities, potential gains and losses

Question 3

What must an analyst do in respect to financial forecasting

Answer 3

Best to base forecasts on information that is readily available and frequent
Should avoid making forecasting models more complicated/detailed that necessary

Question 4

What are the forecast approaches?

Answer 4

1. Base Forecasts on historical results
2. Assume results with converge to a historical Base Rate
3. Use Management Guidance
4. Any other method

Question 5

What are Historical Results and Assumption of Historical base rate convergence?

Answer 5

Historical Results
* Uses past results as the starting point and assumes the result with continue in the future.
* Best for companies that are noncyclical or in the mature stage
* Less appropriate for companies who are cyclical or who are transitioning into a new competitive strategy
Historical Base Rate Convergence
* Assuming that a forecasting oject will converge to an industry average or median growth rate
* Base rate should be computed over a sufficently long time period
* Makes sesne for established industries with publically traded competitors, and where few structural changes are expected
* Not appropriate for cyclical companies

Question 6

What is Management Guidance and Analyst Discretionary Forecast

Answer 6

Management Guidance
* Managers of public companies reveal their earnings and revenue targets and they have internal and industry info not available to the public
* Analyst look to determine whether management assumptions make sense, but with a pinch of salt (management want to look like they exceeded expectations)
* Best when management has history of reasonable estimates, not that helpful for cyclical companies
Analyst Discretionary Forecast
* Catch all for anything else e.g. surveys, models, prob distributions
* Most appropriate when others fall short (in the case of cyclical industries, with no peers, that have no guidance or have no transition)