Ch.5 Financial Forecasting
Goals:
1) Develop pro forma financial statements
2) Learn a Trend Analysis
3) Learn a Regression Analysis
4) Calculate Systematic risks and Beta
coefficient
I. Forecasting Financial Statements
• Planning for future
• Providing information to potential investors
1. Percent of Sales Method
Premise: many incomes and balance sheet
items maintain a constant relationship to the
level of sales
Therefore, our key question is “ Will the item
change directly with Sales? ”.
• If Yes, calculate the percentage of sales and
multiply the result by the sale forecast.
• If No, leave the item unchanged or use other
information.
1-1) Forecasting I/S
Create the percentage of sales income
statement
(Using an average of historical percentage to
estimate futures)
Ex) if we had percentages (84.42% and
83.45%) of sales for Cost of Goods Sold in
2001 and 2000, the average is 83.94%.
Then if the sale ($4,300,000) in 2002 is
expected, the estimated cost of goods sold is
$4300000*0.8394.
1-2) Forecasting Balance Sheet.
Create the percentage of sales balance sheet
(It is not commonsized)
• Classification
- Spontaneous source of financing
(in daily business)
- Discretionary source of financing
• Generally spontaneous sources of financing
can be expected to vary directly with sales
• Difference between total assets and total
liabilities and owner’s equities is referred to
as discretionary financing needed.
• II. Other Forecasting Methods
• 1. Linear Trend Extrapolation
• 1) Making a chart to realize the linearity
• There might be a trend but not at a constant
rate.
• 2) Using Excel’s “Trend” function, extract a
linear relationship
•
•
•
•
Y=mX+b
Ex) Sales forecast
How to estimate m and b?
“TREND(KNOWN_Y’S, KNOWN_X’s,
NEW_X’s, CONST)”
• Here, KNOWN_Y’s means a range of data that we
wish to forecast. KNOWN_X’s means a range of
data that we want to use to determine the trend.
NEW_X’s means a value that will generate
forecasting. CONST means whether or not to
include an intercept in its calculation.
To add a Trend line, click on the plot in the chat >
press a right button on the mouse> “add trend
line” > “linear”> OK
“Forward” in “Option” can automatically forecast
some values, using trend lines.
To display an equation, click on line>press a right
button on the mouse > format trendline >option>
“display equation on chart”
• 3) Regression Analysis: Fitting the best line
to a data set (but no guarantee that the line
you choose is actually the best line).
• Y=mX+b
• Using scatter plot, check the linearity
• It is good for multiple factors.
• Tool > Data Analysis > Regression > OK
• Then provide information to the empty cells
• Ex) S&P 500 and a company
• - coefficient of market is beta