Los 45.c

Question 1

How do you estimate COGS?

Answer 1

Forecast COGS = (Historical COGS / Revenue) * Future Revenue
Forecast COGS = (1-GM) * Estimation of future revenue

Question 2

What’s a limitation of this

Answer 2

COGS is a large part of a companies costs - so has a significant impact on profitability
Firms typically hedge their input costs using derivatives, so analyst must be aware of the proportion hedged that way or of the firms past history

Question 3

How does an analyst treat SG&A Expenses

Answer 3

They are less closely linked to revenue as they have a higher level of fixed costs, although some parts are still variable e.g. selling and distribution.
The variable parts can be modelled as percentage of sales
General corp fixec costs may need to be modleled using a fixed growth rate on expected wage inflation