Los 45.b

Question 1

What is a Top Down Revenue Forecast

Answer 1

Starts with a macro variable e.g .Nominal GDP or Market Growth and then forecasts to see what the revenue will be due to that
e.g. if an analyst forecasts that nominal GDP will grow at 5% and believes a company’s revenue will grow at a 20% faster rate, he will project the company’s sales to increase by 5% × (1 + 0.20) = 6%. Growth or decline expectations are typically based on a company’s life cycle stage and degree of cyclicality.

Question 2

What is a bottom up revenue forecast?

Answer 2

Starts with an individual company and it’s segments - then you make revenue projections based on historical revenue growth
Examples:
Forecasting selling prices and volumes
Forecasting revenues for seeperate products
Forecast revenue growth for a companies existing locations
Forecasting balance sheet items and the return a company will earn on them e.g. Interest revenue forecast
Analysts typically use both

Question 3

How should you treat nonrecurring items for forecasting purposes?

Answer 3

They should be analyzed on a stand alone basis
Ones disclosed by management typically focus on one time events, this is easy for the analyst to identigy
Ones not diclosed and quantified by management require insight