Valuation
FIN 449
Michael Dimond
Financial Forecasting
•
•
•
•
•
•
•
•
Why might the simplest approach not work?
How detailed should be the analysis?
Does history tell the future?
How long of a trend should be observed?
Are the line items independent?
Is growth in a line item really growth in the firm?
Have earnings been manipulated in the past?
Are the cash flows sustainable – can the operation continue
this way?
Michael Dimond
School of Business Administration
General Guidelines for Good Forecasting
• The steps are interdependent. Make adjustments in an order that
makes sense for the business model.
• For example, revenue forecasts may first require forecasts of new
stores
• The financial statements must interconnect
• For example, the change in depreciation on the BS should equal the
depreciation expense for the year.
• Simple errors can be avoided if the spreadsheet is dynamic.
• Allow for the firm’s need for capital in at least one account with a
“TBD” balance
• For example, Extra Funds Needed (EFN) may come from debt or
somewhere else. What has been the firm’s history? What is likely to
be its future?
• GIGO – Garbage In, Garbage Out
• All assumptions must make sense historically, economically and
strategically. The forecast is only as good as the assumptions
• Sensitivity Analysis will test key assumptions
• Those inputs which make the biggest difference when they change
are those which require the most thought care and monitoring.
Michael Dimond
School of Business Administration
High-level Forecasting
• Projected Sales & Income Approach
Year
0
FC1
FC2
FC3
FC4
FC5
Sales Growth
Rate
7.3%
7.3%
7.3%
7.3%
7.3%
$
$
$
$
$
$
Projected
Sales
26,935
28,901
31,011
33,275
35,704
38,310
Net Profit
Margin
10.2%
10.2%
10.2%
10.2%
10.2%
Projected Net
Income
$
$
$
$
$
2,948
3,163
3,394
3,642
3,908
• Projected Total Assets Approach
Year
0
FC1
FC2
FC3
FC4
FC5
Asset Growth Projected Total
Rate
Assets
$
21,695
4.3% $
22,628
4.3% $
23,601
4.3% $
24,616
4.3% $
25,674
4.3% $
26,778
• Problems with these approaches?
Michael Dimond
School of Business Administration
Maybe Something More Sophisticated?
• Remember our friends at DuPont?
Year
0
FC1
FC2
FC3
FC4
FC5
Projected
Average Total
Assets
$
$
$
$
$
$
Projected
Average Asset
Sales
Turnover Rate
26,935
28,901
1.3 $
31,011
1.3 $
33,275
1.3 $
35,704
1.3 $
38,310
1.3 $
22,232
23,855
25,596
27,465
29,469
Projected
Beginning
Total Assets
$
$
$
$
$
21,695
22,769
24,941
26,251
28,683
Projected
Ending Total
Assets
$
21,695
$
22,769
$
24,941
$
26,251
$
28,683
$
30,255
Implied %
Change in
Total Assets
5.0%
9.5%
5.3%
9.3%
5.5%
• What’s the Implied Growth Rate of Average Assets?
Michael Dimond
School of Business Administration
Year
0
FC1
FC2
FC3
FC4
FC5
Asset Growth Projected Total
Rate
Assets
$
21,695
6.9% $
23,191
6.9% $
24,791
6.9% $
26,501
6.9% $
28,329
6.9% $
30,283
Projected Total Projected Total
Year
Assets
Liab. (60%)
0
FC1 $
23,191 $
13,915
FC2 $
24,791 $
14,875
FC3 $
26,501 $
15,901
FC4 $
28,329 $
16,997
FC5 $
30,283 $
18,170
Projected
Equity (40%
$
$
$
$
$
9,277
9,916
10,600
11,332
12,113
• What problems exist with this approach?
Michael Dimond
School of Business Administration
Adjusting as needed
Detailed Forecasting
•
•
•
•
•
•
•
•
•
•
Project Operating Revenues
Project Operating Expenses
Project Operating Assets & Liabilities
Project Financial Need & Capital Structure
Build Pro Forma Balance Sheet
Project Other IS Items
Build Pro Forma Income Statement
Project Dividends & Change in Retained Earnings
Build Pro Forma Statement of Retained Earnings
Project Cash Flows from Operations, Investing &
Financing Activities
• Build Statement of Cash Flows
Adapted from Stickney et al, Financial Reporting and Statement Analysis
Michael Dimond
School of Business Administration
Operating Revenues
• Projecting Sales
• Segments
• Volume
• Price
• Projecting Other Revenue
• Watch for unusual gains, such as from the sale of assets (ask,
“is this a sustainable cash flow?”)
• Forecasting errors
• Some assumptions will be incorrect, but the significance of
each needs to be understood.
• For example, high DOL means more potential for forecasting
error. A small error in sales projections can lever up into larger
errors in projected cash flows.
Michael Dimond
School of Business Administration
Projecting Sales
Michael Dimond
School of Business Administration
Overall Sales Growth
Sales
Growth
CAGR
Year -2
$ 23,385
Year -1
Year 0
$ 25,185 $ 26,935
7.7%
6.9%
7.3%
Michael Dimond
School of Business Administration
Overall Sales Growth
Sales
Growth
CAGR
Year -2
$ 23,385
Year -1
Year 0
$ 25,185 $ 26,935
7.7%
6.9%
7.3%
Sales Growth by Segment
Snack Food Segment
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Worldwide Beverage Segment
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Subsidiary Company
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Year -2
Year -1
Year 0
$ 12,506
$ 13,621
$ 14,504
$
8,886
$
9,592
$ 10,440
$
1,993
$
1,972
$
1,991
Michael Dimond
School of Business Administration
Overall Sales Growth
Sales
Growth
CAGR
Year -2
$ 23,385
Year -1
Year 0
$ 25,185 $ 26,935
7.7%
6.9%
7.3%
Sales Growth by Segment
Year -2
Snack Food Segment
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Worldwide Beverage Segment
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Subsidiary Company
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Year -1
Year 0
$ 12,506 $ 13,621 $ 14,504
53.5%
54.1%
53.8%
$
8,886
$
9,592
$ 10,440
$
1,993
$
1,972
$
1,991
Michael Dimond
School of Business Administration
Overall Sales Growth
Sales
Growth
CAGR
Year -2
$ 23,385
Year -1
Year 0
$ 25,185 $ 26,935
7.7%
6.9%
7.3%
Sales Growth by Segment
Year -2
Snack Food Segment
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Worldwide Beverage Segment
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Subsidiary Company
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Year -1
Year 0
$ 12,506 $ 13,621 $ 14,504
53.5%
54.1%
53.8%
8.9%
6.5%
7.7%
$
8,886
$
9,592
$ 10,440
$
1,993
$
1,972
$
1,991
Michael Dimond
School of Business Administration
Overall Sales Growth
Sales
Growth
CAGR
Year -2
$ 23,385
Year -1
Year 0
$ 25,185 $ 26,935
7.7%
6.9%
7.3%
Sales Growth by Segment
Year -2
Snack Food Segment
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Worldwide Beverage Segment
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Subsidiary Company
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Year -1
Year 0
$ 12,506 $ 13,621 $ 14,504
53.5%
54.1%
53.8%
8.9%
6.5%
7.7%
5.4%
2.2%
$
8,886
$
9,592
$ 10,440
$
1,993
$
1,972
$
1,991
Michael Dimond
School of Business Administration
Overall Sales Growth
Sales
Growth
CAGR
Year -2
$ 23,385
Year -1
Year 0
$ 25,185 $ 26,935
7.7%
6.9%
7.3%
Sales Growth by Segment
Year -2
Snack Food Segment
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Worldwide Beverage Segment
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Subsidiary Company
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Year -1
Year 0
$ 12,506 $ 13,621 $ 14,504
53.5%
54.1%
53.8%
8.9%
6.5%
7.7%
5.4%
2.2%
$
8,886 $
38.0%
9,592 $ 10,440
38.1%
38.8%
7.9%
8.8%
8.4%
5.0%
3.2%
$
1,993 $
8.5%
1,972 $
7.8%
-1.1%
1,991
7.4%
1.0%
-0.1%
-1.0%
1.0%
Michael Dimond
School of Business Administration
Overall Sales Growth
Sales
Growth
CAGR
Year -2
$ 23,385
Year -1
Year 0
$ 25,185 $ 26,935
7.7%
6.9%
7.3%
FC 1
FC 2
FC 3
FC 4
FC 5
FC 1
FC 2
FC 3
FC 4
FC 5
Sales Growth by Segment
Year -2
Snack Food Segment
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Worldwide Beverage Segment
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Subsidiary Company
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Year -1
Year 0
$ 12,506 $ 13,621 $ 14,504
53.5%
54.1%
53.8%
8.9%
6.5%
7.7%
5.4%
2.2%
$
8,886 $
38.0%
9,592 $ 10,440
38.1%
38.8%
7.9%
8.8%
8.4%
5.0%
3.2%
$
1,993 $
8.5%
1,972 $
7.8%
-1.1%
1,991
7.4%
1.0%
-0.1%
-1.0%
1.0%
Michael Dimond
School of Business Administration
Overall Sales Growth
Sales
Growth
CAGR
Year -2
$ 23,385
Year -1
Year 0
$ 25,185 $ 26,935
7.7%
6.9%
7.3%
FC 1
FC 2
FC 3
FC 4
FC 5
FC 1
FC 2
FC 3
FC 4
FC 5
Sales Growth by Segment
Year -2
Snack Food Segment
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Worldwide Beverage Segment
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Subsidiary Company
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Year -1
Year 0
$ 12,506 $ 13,621 $ 14,504
53.5%
54.1%
53.8%
8.9%
6.5%
7.7%
5.4%
2.2%
$
8,886 $
38.0%
9,592 $ 10,440
38.1%
38.8%
7.9%
8.8%
8.4%
5.0%
3.2%
$
1,993 $
8.5%
1,972 $
7.8%
-1.1%
5.0%
2.0%
5.0%
2.0%
5.0%
2.0%
5.0%
2.0%
5.0%
2.0%
1,991
7.4%
1.0%
-0.1%
-1.0%
1.0%
Michael Dimond
School of Business Administration
Overall Sales Growth
Sales
Growth
CAGR
Year -2
$ 23,385
Year -1
Year 0
$ 25,185 $ 26,935
7.7%
6.9%
7.3%
FC 1
FC 2
FC 3
FC 4
FC 5
FC 1
FC 2
FC 3
FC 4
FC 5
Sales Growth by Segment
Year -2
Snack Food Segment
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Worldwide Beverage Segment
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Subsidiary Company
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Year -1
Year 0
$ 12,506 $ 13,621 $ 14,504
53.5%
54.1%
53.8%
8.9%
6.5%
7.7%
5.4%
2.2%
$
8,886 $
38.0%
9,592 $ 10,440
38.1%
38.8%
7.9%
8.8%
8.4%
5.0%
3.2%
$
1,993 $
8.5%
1,972 $
7.8%
-1.1%
7.1%
5.0%
2.0%
7.1%
5.0%
2.0%
7.1%
5.0%
2.0%
7.1%
5.0%
2.0%
7.1%
5.0%
2.0%
1,991
7.4%
1.0%
-0.1%
-1.0%
1.0%
Michael Dimond
School of Business Administration
Overall Sales Growth
Sales
Growth
CAGR
Year -2
$ 23,385
Year -1
Year 0
$ 25,185 $ 26,935
7.7%
6.9%
7.3%
FC 1
FC 2
FC 3
FC 4
FC 5
FC 1
FC 2
FC 3
FC 4
FC 5
$ 15,534
$ 16,637
$ 17,818
$ 19,083
$ 20,438
Sales Growth by Segment
Year -2
Snack Food Segment
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Worldwide Beverage Segment
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Subsidiary Company
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Year -1
Year 0
$ 12,506 $ 13,621 $ 14,504
53.5%
54.1%
53.8%
8.9%
6.5%
7.7%
5.4%
2.2%
$
8,886 $
38.0%
9,592 $ 10,440
38.1%
38.8%
7.9%
8.8%
8.4%
5.0%
3.2%
$
1,993 $
8.5%
1,972 $
7.8%
-1.1%
7.1%
5.0%
2.0%
7.1%
5.0%
2.0%
7.1%
5.0%
2.0%
7.1%
5.0%
2.0%
7.1%
5.0%
2.0%
1,991
7.4%
1.0%
-0.1%
-1.0%
1.0%
Michael Dimond
School of Business Administration
Overall Sales Growth
Sales
Growth
CAGR
Year -2
$ 23,385
Year -1
Year 0
$ 25,185 $ 26,935
7.7%
6.9%
7.3%
FC 1
FC 2
FC 3
FC 4
FC 5
FC 1
FC 2
FC 3
FC 4
FC 5
$ 15,534
$ 16,637
$ 17,818
$ 19,083
$ 20,438
Sales Growth by Segment
Year -2
Snack Food Segment
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Worldwide Beverage Segment
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Subsidiary Company
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Year -1
Year 0
$ 12,506 $ 13,621 $ 14,504
53.5%
54.1%
53.8%
8.9%
6.5%
7.7%
5.4%
2.2%
$
$
8,886 $
38.0%
1,993 $
8.5%
9,592 $ 10,440
38.1%
38.8%
7.9%
8.8%
8.4%
5.0%
3.2%
1,972 $
7.8%
-1.1%
7.1%
5.0%
2.0%
7.1%
5.0%
2.0%
7.1%
5.0%
2.0%
7.1%
5.0%
2.0%
7.1%
5.0%
2.0%
5.0%
3.0%
5.0%
3.0%
5.0%
3.0%
5.0%
3.0%
5.0%
3.0%
1,991
7.4%
1.0%
-0.1%
-1.0%
1.0%
Michael Dimond
School of Business Administration
Overall Sales Growth
Sales
Growth
CAGR
Year -2
$ 23,385
Year -1
Year 0
$ 25,185 $ 26,935
7.7%
6.9%
7.3%
FC 1
FC 2
FC 3
FC 4
FC 5
FC 1
FC 2
FC 3
FC 4
FC 5
$ 15,534
$ 16,637
$ 17,818
$ 19,083
$ 20,438
Sales Growth by Segment
Year -2
Snack Food Segment
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Worldwide Beverage Segment
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Subsidiary Company
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Year -1
Year 0
$ 12,506 $ 13,621 $ 14,504
53.5%
54.1%
53.8%
8.9%
6.5%
7.7%
5.4%
2.2%
$
$
8,886 $
38.0%
1,993 $
8.5%
9,592 $ 10,440
38.1%
38.8%
7.9%
8.8%
8.4%
5.0%
3.2%
1,972 $
7.8%
-1.1%
7.1%
5.0%
2.0%
7.1%
5.0%
2.0%
7.1%
5.0%
2.0%
7.1%
5.0%
2.0%
7.1%
5.0%
2.0%
8.2%
5.0%
3.0%
8.2%
5.0%
3.0%
8.2%
5.0%
3.0%
8.2%
5.0%
3.0%
8.2%
5.0%
3.0%
1,991
7.4%
1.0%
-0.1%
-1.0%
1.0%
Michael Dimond
School of Business Administration
Overall Sales Growth
Sales
Growth
CAGR
Year -2
$ 23,385
Year -1
Year 0
$ 25,185 $ 26,935
7.7%
6.9%
7.3%
FC 1
FC 2
FC 3
FC 4
FC 5
FC 1
FC 2
FC 3
FC 4
FC 5
$ 12,506 $ 13,621 $ 14,504
53.5%
54.1%
53.8%
8.9%
6.5%
7.7%
5.4%
2.2%
$ 15,534
$ 16,637
$ 17,818
$ 19,083
$ 20,438
$
$ 11,291
Sales Growth by Segment
Year -2
Snack Food Segment
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Worldwide Beverage Segment
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Subsidiary Company
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
$
Year -1
8,886 $
38.0%
1,993 $
8.5%
Year 0
9,592 $ 10,440
38.1%
38.8%
7.9%
8.8%
8.4%
5.0%
3.2%
1,972 $
7.8%
-1.1%
7.1%
5.0%
2.0%
8.2%
5.0%
3.0%
7.1%
5.0%
2.0%
$ 12,211
8.2%
5.0%
3.0%
7.1%
5.0%
2.0%
$ 13,206
8.2%
5.0%
3.0%
7.1%
5.0%
2.0%
$ 14,283
8.2%
5.0%
3.0%
7.1%
5.0%
2.0%
$ 15,447
8.2%
5.0%
3.0%
1,991
7.4%
1.0%
-0.1%
-1.0%
1.0%
Michael Dimond
School of Business Administration
Overall Sales Growth
Sales
Growth
CAGR
Year -2
$ 23,385
Year -1
Year 0
$ 25,185 $ 26,935
7.7%
6.9%
7.3%
FC 1
FC 2
FC 3
FC 4
FC 5
FC 1
FC 2
FC 3
FC 4
FC 5
$ 12,506 $ 13,621 $ 14,504
53.5%
54.1%
53.8%
8.9%
6.5%
7.7%
5.4%
2.2%
$ 15,534
$ 16,637
$ 17,818
$ 19,083
$ 20,438
$
$ 11,291
Sales Growth by Segment
Year -2
Snack Food Segment
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Worldwide Beverage Segment
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Subsidiary Company
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
$
Year -1
8,886 $
38.0%
1,993 $
8.5%
Year 0
9,592 $ 10,440
38.1%
38.8%
7.9%
8.8%
8.4%
5.0%
3.2%
1,972 $
7.8%
-1.1%
1,991
7.4%
1.0%
-0.1%
-1.0%
1.0%
7.1%
5.0%
2.0%
7.1%
5.0%
2.0%
$ 12,211
7.1%
5.0%
2.0%
$ 13,206
7.1%
5.0%
2.0%
$ 14,283
7.1%
5.0%
2.0%
$ 15,447
8.2%
5.0%
3.0%
8.2%
5.0%
3.0%
8.2%
5.0%
3.0%
8.2%
5.0%
3.0%
8.2%
5.0%
3.0%
0.0%
1.0%
0.0%
1.0%
0.0%
1.0%
0.0%
1.0%
0.0%
1.0%
Michael Dimond
School of Business Administration
Overall Sales Growth
Sales
Growth
CAGR
Year -2
$ 23,385
Year -1
Year 0
$ 25,185 $ 26,935
7.7%
6.9%
7.3%
FC 1
FC 2
FC 3
FC 4
FC 5
FC 1
FC 2
FC 3
FC 4
FC 5
$ 12,506 $ 13,621 $ 14,504
53.5%
54.1%
53.8%
8.9%
6.5%
7.7%
5.4%
2.2%
$ 15,534
$ 16,637
$ 17,818
$ 19,083
$ 20,438
$
$ 11,291
Sales Growth by Segment
Year -2
Snack Food Segment
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Worldwide Beverage Segment
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Subsidiary Company
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
$
Year -1
8,886 $
38.0%
1,993 $
8.5%
Year 0
9,592 $ 10,440
38.1%
38.8%
7.9%
8.8%
8.4%
5.0%
3.2%
1,972 $
7.8%
-1.1%
1,991
7.4%
1.0%
-0.1%
-1.0%
1.0%
7.1%
5.0%
2.0%
7.1%
5.0%
2.0%
$ 12,211
7.1%
5.0%
2.0%
$ 13,206
7.1%
5.0%
2.0%
$ 14,283
7.1%
5.0%
2.0%
$ 15,447
8.2%
5.0%
3.0%
8.2%
5.0%
3.0%
8.2%
5.0%
3.0%
8.2%
5.0%
3.0%
8.2%
5.0%
3.0%
1.0%
0.0%
1.0%
1.0%
0.0%
1.0%
1.0%
0.0%
1.0%
1.0%
0.0%
1.0%
1.0%
0.0%
1.0%
Michael Dimond
School of Business Administration
Overall Sales Growth
Sales
Growth
CAGR
Year -2
$ 23,385
Year -1
Year 0
$ 25,185 $ 26,935
7.7%
6.9%
7.3%
FC 1
FC 2
FC 3
FC 4
FC 5
FC 1
FC 2
FC 3
FC 4
FC 5
$ 12,506 $ 13,621 $ 14,504
53.5%
54.1%
53.8%
8.9%
6.5%
7.7%
5.4%
2.2%
$ 15,534
$ 16,637
$ 17,818
$ 19,083
$ 20,438
$
9,592 $ 10,440
38.1%
38.8%
7.9%
8.8%
8.4%
5.0%
3.2%
$ 11,291
1,972 $
7.8%
-1.1%
$
Sales Growth by Segment
Year -2
Snack Food Segment
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Worldwide Beverage Segment
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Subsidiary Company
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
$
Year -1
8,886 $
38.0%
1,993 $
8.5%
Year 0
1,991
7.4%
1.0%
-0.1%
-1.0%
1.0%
7.1%
5.0%
2.0%
7.1%
5.0%
2.0%
$ 12,211
8.2%
5.0%
3.0%
2,011
1.0%
0.0%
1.0%
7.1%
5.0%
2.0%
$ 13,206
8.2%
5.0%
3.0%
$
2,031
1.0%
0.0%
1.0%
7.1%
5.0%
2.0%
$ 14,283
8.2%
5.0%
3.0%
$
2,051
1.0%
0.0%
1.0%
7.1%
5.0%
2.0%
$ 15,447
8.2%
5.0%
3.0%
$
2,072
1.0%
0.0%
1.0%
8.2%
5.0%
3.0%
$
2,093
1.0%
0.0%
1.0%
Michael Dimond
School of Business Administration
Overall Sales Growth
Sales
Growth
CAGR
Year -2
$ 23,385
Year -1
Year 0
$ 25,185 $ 26,935
7.7%
6.9%
7.3%
FC 1
$ 28,836
FC 2
$ 30,879
FC 3
$ 33,075
FC 4
$ 35,437
FC 5
$ 37,977
FC 1
FC 2
FC 3
FC 4
FC 5
$ 12,506 $ 13,621 $ 14,504
53.5%
54.1%
53.8%
8.9%
6.5%
7.7%
5.4%
2.2%
$ 15,534
$ 16,637
$ 17,818
$ 19,083
$ 20,438
$
9,592 $ 10,440
38.1%
38.8%
7.9%
8.8%
8.4%
5.0%
3.2%
$ 11,291
1,972 $
7.8%
-1.1%
$
Sales Growth by Segment
Year -2
Snack Food Segment
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Worldwide Beverage Segment
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Subsidiary Company
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
$
Year -1
8,886 $
38.0%
1,993 $
8.5%
Year 0
1,991
7.4%
1.0%
-0.1%
-1.0%
1.0%
7.1%
5.0%
2.0%
7.1%
5.0%
2.0%
$ 12,211
8.2%
5.0%
3.0%
2,011
1.0%
0.0%
1.0%
7.1%
5.0%
2.0%
$ 13,206
8.2%
5.0%
3.0%
$
2,031
1.0%
0.0%
1.0%
7.1%
5.0%
2.0%
$ 14,283
8.2%
5.0%
3.0%
$
2,051
1.0%
0.0%
1.0%
7.1%
5.0%
2.0%
$ 15,447
8.2%
5.0%
3.0%
$
2,072
1.0%
0.0%
1.0%
8.2%
5.0%
3.0%
$
2,093
1.0%
0.0%
1.0%
Michael Dimond
School of Business Administration
Overall Sales Growth
Sales
Growth
CAGR
Year -2
$ 23,385
Year -1
Year 0
$ 25,185 $ 26,935
7.7%
6.9%
7.3%
FC 1
$ 28,836
FC 2
$ 30,879
FC 3
$ 33,075
FC 4
$ 35,437
FC 5
$ 37,977
FC 1
FC 2
FC 3
FC 4
FC 5
Sales Growth by Segment
Year -2
Snack Food Segment
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Worldwide Beverage Segment
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Subsidiary Company
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Year -1
Year 0
$ 12,506 $ 13,621 $ 14,504
53.5%
54.1%
53.8%
8.9%
6.5%
7.7%
5.4%
2.2%
$ 15,534 $ 16,637 $ 17,818 $ 19,083 $ 20,438
53.9%
53.9%
53.9%
53.8%
53.8%
$
9,592 $ 10,440
38.1%
38.8%
7.9%
8.8%
8.4%
5.0%
3.2%
$ 11,291 $ 12,211 $ 13,206 $ 14,283 $ 15,447
39.2%
39.5%
39.9%
40.3%
40.7%
1,972 $
7.8%
-1.1%
$
$
8,886 $
38.0%
1,993 $
8.5%
1,991
7.4%
1.0%
-0.1%
-1.0%
1.0%
7.1%
5.0%
2.0%
8.2%
5.0%
3.0%
2,011 $
7.0%
1.0%
0.0%
1.0%
7.1%
5.0%
2.0%
8.2%
5.0%
3.0%
2,031 $
6.6%
1.0%
0.0%
1.0%
7.1%
5.0%
2.0%
8.2%
5.0%
3.0%
2,051 $
6.2%
1.0%
0.0%
1.0%
7.1%
5.0%
2.0%
8.2%
5.0%
3.0%
2,072 $
5.8%
1.0%
0.0%
1.0%
7.1%
5.0%
2.0%
8.2%
5.0%
3.0%
2,093
5.5%
1.0%
0.0%
1.0%
Michael Dimond
School of Business Administration
Overall Sales Growth
Sales
Growth
CAGR
Year -2
$ 23,385
Year -1
Year 0
$ 25,185 $ 26,935
7.7%
6.9%
7.3%
FC 1
$ 28,836
FC 2
FC 3
FC 4
FC 5
$ 30,879 $ 33,075 $ 35,437 $ 37,977
7.1%
7.1%
7.1%
7.2%
7.1%
Sales Growth by Segment
Year -2
Snack Food Segment
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Worldwide Beverage Segment
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Subsidiary Company
Sales
Percent of Total Sales
Growth
CAGR (in $)
CAGR (in Sales Volume)
CAGR (in Price)
Year -1
Year 0
FC 1
FC 2
FC 3
FC 4
FC 5
$ 12,506 $ 13,621 $ 14,504
53.5%
54.1%
53.8%
8.9%
6.5%
7.7%
5.4%
2.2%
$ 15,534 $ 16,637 $ 17,818 $ 19,083 $ 20,438
53.9%
53.9%
53.9%
53.8%
53.8%
$
9,592 $ 10,440
38.1%
38.8%
7.9%
8.8%
8.4%
5.0%
3.2%
$ 11,291 $ 12,211 $ 13,206 $ 14,283 $ 15,447
39.2%
39.5%
39.9%
40.3%
40.7%
1,972 $
7.8%
-1.1%
$
$
8,886 $
38.0%
1,993 $
8.5%
1,991
7.4%
1.0%
-0.1%
-1.0%
1.0%
7.1%
5.0%
2.0%
8.2%
5.0%
3.0%
2,011 $
7.0%
1.0%
0.0%
1.0%
7.1%
5.0%
2.0%
8.2%
5.0%
3.0%
2,031 $
6.6%
1.0%
0.0%
1.0%
7.1%
5.0%
2.0%
8.2%
5.0%
3.0%
2,051 $
6.2%
1.0%
0.0%
1.0%
7.1%
5.0%
2.0%
8.2%
5.0%
3.0%
2,072 $
5.8%
1.0%
0.0%
1.0%
7.1%
5.0%
2.0%
8.2%
5.0%
3.0%
2,093
5.5%
1.0%
0.0%
1.0%
Michael Dimond
School of Business Administration
Been to a video store lately?
•
•
•
•
The 80s video store
Video chains
Delivery
Streaming
Michael Dimond
School of Business Administration
Netflix
Revenues (000s)
2500000
2000000
1500000
1000000
500000
0
2005
2006
2007
2008
2009
2010
• Sales $ growth 46%, 21%, 13%, 22%, 29% respectively
• Sales $ CAGR 26%
Michael Dimond
School of Business Administration
Netflix
Total subscribers at end of period (000s)
25000
20000
15000
10000
5000
0
2005
2006
2007
2008
2009
2010
• Sales Vol growth 51%, 18% 26%, 31%, 63% respectively
• Sales Vol CAGR 37%
Michael Dimond
School of Business Administration
Netflix
Monthly Plan
$14
$13
$12
$11
$10
$9
$8
2005
2006
2007
2008
2009
2010
• Sales Price growth…
• Sales Price CAGR…
Michael Dimond
School of Business Administration
Netflix
Sales $ growth
Sales Volume growth
Sales Price growth
46%
51%
21%
18%
13%
26%
22%
31%
Michael Dimond
School of Business Administration
Been to a video store lately?
• How has Netflix revenue model changed?
1 Out Limited
1 Out Unlimited
2 Out Unlimited
3 Out Unlimited
4 Out Unlimited
etc.
$ 4.99
$ 8.99
$ 13.99
$ 16.99
$ 23.99
1 Out Limited
1 Out Unlimited
2 Out Unlimited
3 Out Unlimited
4 Out Unlimited
etc.
$ 4.99
$ 9.99
$ 14.99
$ 19.99
$ 27.99
Michael Dimond
School of Business Administration
Been to a video store lately?
•
•
•
•
•
•
•
•
The 80s video store
Video chains
Delivery
Streaming
Better streaming
NPD, not R&D
The extra dollar
Customer Satisfaction Proposition
(not Customer “Value” Proposition, IMHO)
• Forecasting
• Graduation
Michael Dimond
School of Business Administration
Operating Expenses
Percent of Sales:
• Cost of Goods Sold
• Selling, General & Administrative Expenses
• Other Operating Expenses
• Watch for “one time” expenditures. These may be legitimately
unique or be an indication of manipulation.
Michael Dimond
School of Business Administration
Projecting Operating Expenses
Michael Dimond
School of Business Administration
Cost of Goods Sold
Sales
COGS
COGS as % of Sales
Year -2
$ 23,385
$ 9,635
Year -1
$ 25,185
$ 10,099
Year 0
$ 26,935
$ 10,747
Michael Dimond
School of Business Administration
Cost of Goods Sold
Sales
COGS
COGS as % of Sales
Year -2
Year -1
Year 0
$ 23,385 $ 25,185 $ 26,935
$ 9,635 $ 10,099 $ 10,747
41.2%
40.1%
39.9%
Michael Dimond
School of Business Administration
Cost of Goods Sold
Sales
COGS
COGS as % of Sales
Year -2
Year -1
Year 0
$ 23,385 $ 25,185 $ 26,935
$ 9,635 $ 10,099 $ 10,747
41.2%
40.1%
39.9%
FC 1
$ 28,836
39.7%
FC 2
$ 30,879
39.5%
FC 3
$ 33,075
39.3%
FC 4
$ 35,437
39.1%
FC 5
$ 37,977
39.0% flattening at 39.0% for FC6+
Michael Dimond
School of Business Administration
Cost of Goods Sold
Sales
COGS
COGS as % of Sales
Year -2
Year -1
Year 0
$ 23,385 $ 25,185 $ 26,935
$ 9,635 $ 10,099 $ 10,747
41.2%
40.1%
39.9%
FC 1
FC 2
FC 3
FC 4
FC 5
$ 28,836 $ 30,879 $ 33,075 $ 35,437 $ 37,977
$ 11,448 $ 12,197 $ 12,999 $ 13,856 $ 14,811
39.7%
39.5%
39.3%
39.1%
39.0% flattening at 39.0% for FC6+
Michael Dimond
School of Business Administration
Cost of Goods Sold
Sales
COGS
COGS as % of Sales
Year -2
Year -1
Year 0
$ 23,385 $ 25,185 $ 26,935
$ 9,635 $ 10,099 $ 10,747
41.2%
40.1%
39.9%
Selling, General & Administrative
Year -2
Year -1
Year 0
Sales
$ 23,385 $ 25,185 $ 26,935
SG&A
$ 10,266 $ 10,981 $ 11,609
SG&A as % of Sales
43.9%
43.6%
43.1%
FC 1
FC 2
FC 3
FC 4
FC 5
$ 28,836 $ 30,879 $ 33,075 $ 35,437 $ 37,977
$ 11,448 $ 12,197 $ 12,999 $ 13,856 $ 14,811
39.7%
39.5%
39.3%
39.1%
39.0% flattening at 39.0% for FC6+
FC 1
$ 28,836
43.1%
FC 2
$ 30,879
43.1%
FC 3
$ 33,075
43.1%
FC 4
$ 35,437
43.1%
FC 5
$ 37,977
43.1% flat at 43.1% for all FC years
Michael Dimond
School of Business Administration
Cost of Goods Sold
Year -2
Year -1
Year 0
$ 23,385 $ 25,185 $ 26,935
$ 9,635 $ 10,099 $ 10,747
41.2%
40.1%
39.9%
FC 1
FC 2
FC 3
FC 4
FC 5
$ 28,836 $ 30,879 $ 33,075 $ 35,437 $ 37,977
$ 11,448 $ 12,197 $ 12,999 $ 13,856 $ 14,811
39.7%
39.5%
39.3%
39.1%
39.0% flattening at 39.0% for FC6+
Selling, General & Administrative
Year -2
Year -1
Year 0
Sales
$ 23,385 $ 25,185 $ 26,935
SG&A
$ 10,266 $ 10,981 $ 11,609
SG&A as % of Sales
43.9%
43.6%
43.1%
FC 1
FC 2
FC 3
FC 4
FC 5
$ 28,836 $ 30,879 $ 33,075 $ 35,437 $ 37,977
$ 12,428 $ 13,309 $ 14,256 $ 15,274 $ 16,368
43.1%
43.1%
43.1%
43.1%
43.1% flat at 43.1% for all FC years
Sales
COGS
COGS as % of Sales
Michael Dimond
School of Business Administration
Cost of Goods Sold
Year -2
Year -1
Year 0
$ 23,385 $ 25,185 $ 26,935
$ 9,635 $ 10,099 $ 10,747
41.2%
40.1%
39.9%
FC 1
FC 2
FC 3
FC 4
FC 5
$ 28,836 $ 30,879 $ 33,075 $ 35,437 $ 37,977
$ 11,448 $ 12,197 $ 12,999 $ 13,856 $ 14,811
39.7%
39.5%
39.3%
39.1%
39.0% flattening at 39.0% for FC6+
Selling, General & Administrative
Year -2
Year -1
Year 0
Sales
$ 23,385 $ 25,185 $ 26,935
SG&A
$ 10,266 $ 10,981 $ 11,609
SG&A as % of Sales
43.9%
43.6%
43.1%
FC 1
FC 2
FC 3
FC 4
FC 5
$ 28,836 $ 30,879 $ 33,075 $ 35,437 $ 37,977
$ 12,428 $ 13,309 $ 14,256 $ 15,274 $ 16,368
43.1%
43.1%
43.1%
43.1%
43.1% flat at 43.1% for all FC years
Sales
COGS
COGS as % of Sales
Other Reasonable Growth Assumptions
Other Revenue
5.5% ROI
Other Expenses
0.2% of Sales
Interest Income
4.2% average earned on Average Cash & Short Term Investments
Interest Expense
6.0% on Average Short Term Borrowing, Current Maturities of LT Debt, and LT Debt
Income Tax Expense
32.0% Effective Tax Rate
Preferred Dividends
Constant Preferred Dividend $ Figure
Common Dividends
Dividend Payout Rate of 38.0% of Net Income, plus any necessary adjustment to the Balance Sheet
Michael Dimond
School of Business Administration
Assets
•
•
•
•
•
•
•
Cash & Marketable Securities
Accounts Receivable
Inventories
Other Current Assets
Investments in Unconsolidated Affiliates
Property, Plant & Equipment
Other Assets
• What assets vary as a function of Total Assets?
Michael Dimond
School of Business Administration
Assets
•
•
•
•
•
•
•
Cash & Marketable Securities (Days Sales)
Accounts Receivable (Days Sales)
Inventories (COGS x Inventory Turnover)
Other Current Assets (% of Total Assets?)
Investments in Unconsolidated Affiliates (TBD)
Property, Plant & Equipment (explicit model)
Other Assets (TBD)
• Few assets vary as a % of Total Assets
Michael Dimond
School of Business Administration
Projecting Assets
Michael Dimond
School of Business Administration
Cash
Days Sales in Cash
Sales
Avg Sales per Day
Year-end Cash Balance
Year 0
10 days
$26,935
FC 1
10 days
$28,836
FC 2
10 days
$30,879
FC 3
10 days
$33,075
FC 4
10 days
$35,437
FC 5
10 days flat 10 days Sales in Cash
$37,977
Michael Dimond
School of Business Administration
Cash
Days Sales in Cash
Sales
Avg Sales per Day
Year-end Cash Balance
Year 0
10 days
$26,935
$73.8
FC 1
10 days
$28,836
$79.0
FC 2
10 days
$30,879
$84.6
FC 3
10 days
$33,075
$90.6
FC 4
10 days
$35,437
$97.1
FC 5
10 days flat 10 days Sales in Cash
$37,977
$104.0
Michael Dimond
School of Business Administration
Cash
Days Sales in Cash
Sales
Avg Sales per Day
Year-end Cash Balance
Year 0
10 days
$26,935
$73.8
$738
FC 1
10 days
$28,836
$79.0
$790
FC 2
10 days
$30,879
$84.6
$846
FC 3
10 days
$33,075
$90.6
$906
FC 4
10 days
$35,437
$97.1
$971
FC 5
10 days flat 10 days Sales in Cash
$37,977
$104.0
$1,040
Michael Dimond
School of Business Administration
Accounts Receivable
Accounts Receivable Collection
Sales
Average Accounts Receivable
End of Year Accounts Receivable
Beg. Of Year Accounts Receivable
Year 0
29 days
$26,935
FC 1
29 days
$28,836
FC 2
29 days
$30,879
FC 3
29 days
$33,075
FC 4
29 days
$35,437
FC 5
29 days flat 29 days A/R Collection
$37,977
$2,142
Michael Dimond
School of Business Administration
Accounts Receivable
Accounts Receivable Collection
Sales
Average Accounts Receivable
End of Year Accounts Receivable
Beg. Of Year Accounts Receivable
Year 0
29 days
$26,935
FC 1
29 days
$28,836
$2,291
FC 2
29 days
$30,879
$2,453
FC 3
29 days
$33,075
$2,628
FC 4
29 days
$35,437
$2,816
FC 5
29 days flat 29 days A/R Collection
$37,977
$3,017 Sales * Collection Period / 365
$2,142
$2,142
Michael Dimond
School of Business Administration
Accounts Receivable
Accounts Receivable Collection
Sales
Average Accounts Receivable
End of Year Accounts Receivable
Beg. Of Year Accounts Receivable
Year 0
29 days
$26,935
$2,142
FC 1
29 days
$28,836
$2,291
$2,440
$2,142
FC 2
29 days
$30,879
$2,453
$2,467
$2,440
FC 3
29 days
$33,075
$2,628
$2,789
$2,467
FC 4
29 days
$35,437
$2,816
$2,842
$2,789
FC 5
29 days flat 29 days A/R Collection
$37,977
$3,017 Sales * Collection Period / 365
$3,193
$2,842
Michael Dimond
School of Business Administration
Accounts Receivable
Accounts Receivable Collection
Sales
Average Accounts Receivable
End of Year Accounts Receivable
Beg. Of Year Accounts Receivable
Year 0
29 days
$26,935
$2,142
FC 1
29 days
$28,836
$2,291
$2,440
$2,142
FC 2
29 days
$30,879
$2,453
$2,467
$2,440
FC 3
29 days
$33,075
$2,628
$2,789
$2,467
FC 4
29 days
$35,437
$2,816
$2,842
$2,789
FC 5
29 days flat 29 days A/R Collection
$37,977
$3,017 Sales * Collection Period / 365
$3,193
$2,842
FC 1
8.7
$11,448
FC 2
8.7
$12,197
FC 3
8.7
$12,999
FC 4
8.7
$13,856
FC 5
8.7 flat 8.7 Inventory Turnover rate
$14,811
Inventories
Inventory Turnover
COGS
Average Inventories
End of Year Inventories
Beg. Of Year Inventories
Year 0
8.7
$10,747
$1,310
Michael Dimond
School of Business Administration
Accounts Receivable
Accounts Receivable Collection
Sales
Average Accounts Receivable
End of Year Accounts Receivable
Beg. Of Year Accounts Receivable
Year 0
29 days
$26,935
$2,142
FC 1
29 days
$28,836
$2,291
$2,440
$2,142
FC 2
29 days
$30,879
$2,453
$2,467
$2,440
FC 3
29 days
$33,075
$2,628
$2,789
$2,467
FC 4
29 days
$35,437
$2,816
$2,842
$2,789
FC 5
29 days flat 29 days A/R Collection
$37,977
$3,017 Sales * Collection Period / 365
$3,193
$2,842
FC 1
8.7
$11,448
$1,316
FC 2
8.7
$12,197
$1,402
FC 3
8.7
$12,999
$1,494
FC 4
8.7
$13,856
$1,593
FC 5
8.7 flat 8.7 Inventory Turnover rate
$14,811
$1,702
Inventories
Inventory Turnover
COGS
Average Inventories
End of Year Inventories
Beg. Of Year Inventories
Year 0
8.7
$10,747
$1,310
$1,310
Michael Dimond
School of Business Administration
Accounts Receivable
Accounts Receivable Collection
Sales
Average Accounts Receivable
End of Year Accounts Receivable
Beg. Of Year Accounts Receivable
Year 0
29 days
$26,935
$2,142
FC 1
29 days
$28,836
$2,291
$2,440
$2,142
FC 2
29 days
$30,879
$2,453
$2,467
$2,440
FC 3
29 days
$33,075
$2,628
$2,789
$2,467
FC 4
29 days
$35,437
$2,816
$2,842
$2,789
FC 5
29 days flat 29 days A/R Collection
$37,977
$3,017 Sales * Collection Period / 365
$3,193
$2,842
FC 1
8.7
$11,448
$1,316
$1,322
$1,310
FC 2
8.7
$12,197
$1,402
$1,482
$1,322
FC 3
8.7
$12,999
$1,494
$1,506
$1,482
FC 4
8.7
$13,856
$1,593
$1,679
$1,506
FC 5
8.7 flat 8.7 Inventory Turnover rate
$14,811
$1,702
$1,725
$1,679
Inventories
Inventory Turnover
COGS
Average Inventories
End of Year Inventories
Beg. Of Year Inventories
Year 0
8.7
$10,747
$1,310
Michael Dimond
School of Business Administration
Property, Plant & Equipment
Year 0
Sales Growth
Capital Expenditures
Ending Balance at Cost
Depreciation Expense
Accumulated Depreciation
Ending Balance Net
$1,324
$12,180
FC 1
7.1%
FC 2
7.1%
FC 3
7.1%
FC 4
7.1%
FC 5
7.2%
grows at same rate as Sales
per depreciation schedule
($5,304)
$6,876
Michael Dimond
School of Business Administration
Property, Plant & Equipment
Year 0
Sales Growth
Capital Expenditures
Ending Balance at Cost
Depreciation Expense
Accumulated Depreciation
Ending Balance Net
$1,324
$12,180
FC 1
7.1%
$1,417
FC 2
7.1%
$1,518
FC 3
7.1%
$1,626
FC 4
7.1%
$1,742
FC 5
7.2%
$1,867 grows at same rate as Sales
per depreciation schedule
($5,304)
$6,876
Michael Dimond
School of Business Administration
Property, Plant & Equipment
Year 0
Sales Growth
Capital Expenditures
Ending Balance at Cost
Depreciation Expense
Accumulated Depreciation
Ending Balance Net
$1,324
$12,180
FC 1
7.1%
$1,417
$13,597
FC 2
7.1%
$1,518
$15,115
FC 3
7.1%
$1,626
$16,741
FC 4
7.1%
$1,742
$18,483
FC 5
7.2%
$1,867 grows at same rate as Sales
$20,350
per depreciation schedule
($5,304)
$6,876
Michael Dimond
School of Business Administration
Property, Plant & Equipment
Year 0
Sales Growth
Capital Expenditures
Ending Balance at Cost
Depreciation Expense
Accumulated Depreciation
Ending Balance Net
$1,324
$12,180
($5,304)
$6,876
FC 1
7.1%
$1,417
$13,597
($903)
($6,207)
FC 2
7.1%
$1,518
$15,115
FC 3
7.1%
$1,626
$16,741
FC 4
7.1%
$1,742
$18,483
FC 5
7.2%
$1,867 grows at same rate as Sales
$20,350
per depreciation schedule
Michael Dimond
School of Business Administration
Property, Plant & Equipment
Year 0
Sales Growth
Capital Expenditures
Ending Balance at Cost
Depreciation Expense
Accumulated Depreciation
Ending Balance Net
$1,324
$12,180
($5,304)
$6,876
FC 1
7.1%
$1,417
$13,597
($903)
($6,207)
$7,390
FC 2
7.1%
$1,518
$15,115
FC 3
7.1%
$1,626
$16,741
FC 4
7.1%
$1,742
$18,483
FC 5
7.2%
$1,867 grows at same rate as Sales
$20,350
per depreciation schedule
Michael Dimond
School of Business Administration
Property, Plant & Equipment
Year 0
Sales Growth
Capital Expenditures
Ending Balance at Cost
Depreciation Expense
Accumulated Depreciation
Ending Balance Net
$1,324
$12,180
($5,304)
$6,876
FC 1
7.1%
$1,417
$13,597
($903)
($6,207)
$7,390
FC 2
7.1%
$1,518
$15,115
($967)
FC 3
7.1%
$1,626
$16,741
($1,036)
FC 4
7.1%
$1,742
$18,483
($1,110)
FC 5
7.2%
$1,867 grows at same rate as Sales
$20,350
($1,190) per depreciation schedule
Michael Dimond
School of Business Administration
Property, Plant & Equipment
Year 0
Sales Growth
Capital Expenditures
Ending Balance at Cost
Depreciation Expense
Accumulated Depreciation
Ending Balance Net
$1,324
$12,180
($5,304)
$6,876
FC 1
7.1%
$1,417
$13,597
($903)
($6,207)
$7,390
FC 2
7.1%
$1,518
$15,115
($967)
($7,174)
$7,941
FC 3
7.1%
$1,626
$16,741
($1,036)
($8,210)
$8,531
FC 4
FC 5
7.1%
7.2%
$1,742
$1,867 grows at same rate as Sales
$18,483
$20,350
($1,110) ($1,190) per depreciation schedule
($9,320) ($10,510)
$9,163
$9,840
Michael Dimond
School of Business Administration
Other Assets (such as trademarks, brands, goodwill and other intabngibles from acquisitions)
Year 0
FC 1
FC 2
FC 3
FC 4
FC 5
Sales Growth
7.1%
7.1%
7.1%
7.1%
7.2%
Other Assets (at Year End)
$6,095
$6,525
$6,987
$7,485
$8,019
$8,594 grows at same rate as Sales
Other Reasonable Asset Assumptions
Short-term Investments
4.5% of Total Assets
Marketable Securities
4.5% of Total Assets
Other Current Assets
3.5% of Total Assets
Investments
14.0% of Total Assets
Michael Dimond
School of Business Administration
Liabilities
•
•
•
•
•
•
•
Accounts Payable (Based on Days Inventory)
Other Current Liabilities (Same % as SG&A?)
Short-term Borrowings (Trend?)
Long-term Debt (Trend?)
Current Maturities of LT Debt (Explicit Model)
Deferred Income Taxes (Same % as Sales?)
Other Non-current Liabilities (Same % as SG&A?)
Michael Dimond
School of Business Administration
Projecting Liabilities
Michael Dimond
School of Business Administration
Accounts Payable
COGS
PLUS Ending Inventory
LESS Beginning Inventory
Inventory Purchases
Paybles Period
Average Accounts Payable
Beg. Of Year Accounts Payable
End of Year Accounts Payable
Year 0
$10,747
$1,310
FC 1
$11,448
$1,322
FC 2
$12,197
$1,482
FC 3
$12,999
$1,506
FC 4
$13,856
$1,679
FC 5
$14,811
$1,725
41 days
41 days
41 days
41 days
41 days
flat at 41 days
$1,238
Michael Dimond
School of Business Administration
Accounts Payable
COGS
PLUS Ending Inventory
LESS Beginning Inventory
Inventory Purchases
Paybles Period
Average Accounts Payable
Beg. Of Year Accounts Payable
End of Year Accounts Payable
Year 0
$10,747
$1,310
FC 1
FC 2
$11,448
$12,197
$1,322
$1,482
($1,310)
FC 3
$12,999
$1,506
FC 4
$13,856
$1,679
FC 5
$14,811
$1,725
41 days
41 days
41 days
41 days
41 days
flat at 41 days
$1,238
Michael Dimond
School of Business Administration
Accounts Payable
COGS
PLUS Ending Inventory
LESS Beginning Inventory
Inventory Purchases
Paybles Period
Average Accounts Payable
Beg. Of Year Accounts Payable
End of Year Accounts Payable
Year 0
$10,747
$1,310
FC 1
FC 2
FC 3
FC 4
FC 5
$11,448
$12,197
$12,999
$13,856
$14,811
$1,322
$1,482
$1,506
$1,679
$1,725
($1,310) ($1,322) ($1,482) ($1,506) ($1,679)
41 days
41 days
41 days
41 days
41 days
flat at 41 days
$1,238
Michael Dimond
School of Business Administration
Accounts Payable
COGS
PLUS Ending Inventory
LESS Beginning Inventory
Inventory Purchases
Paybles Period
Average Accounts Payable
Beg. Of Year Accounts Payable
End of Year Accounts Payable
Year 0
$10,747
$1,310
FC 1
FC 2
FC 3
FC 4
FC 5
$11,448
$12,197
$12,999
$13,856
$14,811
$1,322
$1,482
$1,506
$1,679
$1,725
($1,310) ($1,322) ($1,482) ($1,506) ($1,679)
$11,459
41 days
41 days
41 days
41 days
41 days flat at 41 days
$1,238
Michael Dimond
School of Business Administration
Accounts Payable
COGS
PLUS Ending Inventory
LESS Beginning Inventory
Inventory Purchases
Paybles Period
Average Accounts Payable
Beg. Of Year Accounts Payable
End of Year Accounts Payable
Year 0
$10,747
$1,310
FC 1
FC 2
FC 3
FC 4
FC 5
$11,448
$12,197
$12,999
$13,856
$14,811
$1,322
$1,482
$1,506
$1,679
$1,725
($1,310) ($1,322) ($1,482) ($1,506) ($1,679)
$11,459
$12,358
$13,022
$14,029
$14,857
41 days
41 days
41 days
41 days
41 days flat at 41 days
$1,238
Michael Dimond
School of Business Administration
Accounts Payable
COGS
PLUS Ending Inventory
LESS Beginning Inventory
Inventory Purchases
Paybles Period
Average Accounts Payable
Beg. Of Year Accounts Payable
End of Year Accounts Payable
Year 0
$10,747
$1,310
FC 1
FC 2
FC 3
FC 4
FC 5
$11,448
$12,197
$12,999
$13,856
$14,811
$1,322
$1,482
$1,506
$1,679
$1,725
($1,310) ($1,322) ($1,482) ($1,506) ($1,679)
$11,459
$12,358
$13,022
$14,029
$14,857
41 days
41 days
41 days
41 days
41 days flat at 41 days
purchases * period / 365
$1,238
Michael Dimond
School of Business Administration
Accounts Payable
COGS
PLUS Ending Inventory
LESS Beginning Inventory
Inventory Purchases
Paybles Period
Average Accounts Payable
Beg. Of Year Accounts Payable
End of Year Accounts Payable
Year 0
$10,747
$1,310
FC 1
FC 2
FC 3
FC 4
FC 5
$11,448
$12,197
$12,999
$13,856
$14,811
$1,322
$1,482
$1,506
$1,679
$1,725
($1,310) ($1,322) ($1,482) ($1,506) ($1,679)
$11,459
$12,358
$13,022
$14,029
$14,857
41 days
41 days
41 days
41 days
41 days flat at 41 days
$1,287
purchases * period / 365
$1,238
Michael Dimond
School of Business Administration
Accounts Payable
COGS
PLUS Ending Inventory
LESS Beginning Inventory
Inventory Purchases
Paybles Period
Average Accounts Payable
Beg. Of Year Accounts Payable
End of Year Accounts Payable
Year 0
$10,747
$1,310
FC 1
FC 2
FC 3
FC 4
FC 5
$11,448
$12,197
$12,999
$13,856
$14,811
$1,322
$1,482
$1,506
$1,679
$1,725
($1,310) ($1,322) ($1,482) ($1,506) ($1,679)
$11,459
$12,358
$13,022
$14,029
$14,857
41 days
41 days
41 days
41 days
41 days flat at 41 days
$1,287
purchases * period / 365
$1,238
$1,238
Michael Dimond
School of Business Administration
Accounts Payable
COGS
PLUS Ending Inventory
LESS Beginning Inventory
Inventory Purchases
Paybles Period
Average Accounts Payable
Beg. Of Year Accounts Payable
End of Year Accounts Payable
Year 0
$10,747
$1,310
$1,238
FC 1
FC 2
FC 3
FC 4
FC 5
$11,448
$12,197
$12,999
$13,856
$14,811
$1,322
$1,482
$1,506
$1,679
$1,725
($1,310) ($1,322) ($1,482) ($1,506) ($1,679)
$11,459
$12,358
$13,022
$14,029
$14,857
41 days
41 days
41 days
41 days
41 days flat at 41 days
$1,287
purchases * period / 365
$1,238
$1,336
Michael Dimond
School of Business Administration
Accounts Payable
COGS
PLUS Ending Inventory
LESS Beginning Inventory
Inventory Purchases
Paybles Period
Average Accounts Payable
Beg. Of Year Accounts Payable
End of Year Accounts Payable
Year 0
$10,747
$1,310
$1,238
FC 1
FC 2
FC 3
FC 4
FC 5
$11,448
$12,197
$12,999
$13,856
$14,811
$1,322
$1,482
$1,506
$1,679
$1,725
($1,310) ($1,322) ($1,482) ($1,506) ($1,679)
$11,459
$12,358
$13,022
$14,029
$14,857
41 days
41 days
41 days
41 days
41 days flat at 41 days
$1,287
$1,388
$1,463
$1,576
$1,669 purchases * period / 365
$1,238
$1,336
$1,440
$1,486
$1,666
$1,336
$1,440
$1,486
$1,666
$1,672
Michael Dimond
School of Business Administration
Other Current Liabilities
Year 0
Sales Growth
Other Current Liabilities (at EOY)
$3,406
FC 1
7.1%
$3,646
FC 2
7.1%
$3,905
FC 3
7.1%
$4,182
FC 4
7.1%
$4,481
FC 5
7.2%
$4,802 grows at same rate as Sales
FC 1
7.1%
$1,602
FC 2
7.1%
$1,715
FC 3
7.1%
$1,837
FC 4
7.1%
$1,968
FC 5
7.2%
$2,109 grows at same rate as Sales
FC 1
7.1%
$4,149
FC 2
7.1%
$4,444
FC 3
7.1%
$4,760
FC 4
7.1%
$5,100
FC 5
7.2%
$5,465 grows at same rate as Sales
Deferred Income Taxes
Year 0
Sales Growth
Deferred Income Taxes (at EOY)
$1,496
Other Noncurrent Liabilities
Year 0
Sales Growth
Other Noncurrent Liabilities (at EOY)
Other Reasonable Asset Assumptions
Short-term Borrowings
$3,876
0.5% of Total Assets
Michael Dimond
School of Business Administration
Equity Items
Consider these is these in the context of assets & liabilities
which have been forecasted
• Preferred Stock (rarely changes)
• Minority Interest (rarely changes)
• Common Stock (TBD)
• Capital In Excess of Par Value (TBD)
• Accumulated Other Comprehensive Loss (TBD)
• Other Equity Adjustments (TBD)
• Treasury Stock (TBD)
Michael Dimond
School of Business Administration
Financial Need & Capital Structure
• The Balance Sheet will probably not balance without
adjustment
• Is there a source of or a need for additional capital?
• EFN (Extra Funds Needed) can be modeled explicitly from
financial statements (based on the imbalance), but this will
require iterative adjustments to expenses such as interest,
which will influence balances such as cash, which…
Michael Dimond
School of Business Administration
Financial Need & Capital Structure
• EFN can also be estimated in this way:
• Where
•
•
•
•
•
•
•
•
A* = assets that increase proportionally with sales
L* = liabilities that increase proportionally with sales
g = growth rate in sales
EBIT = operating income
T = tax rate
d = dividend payout ratio
I0 = interest expense (ignoring any additional financing)
i = interest rate on additional funds borrowed
Michael Dimond
School of Business Administration
Financial Need & Capital Structure
• Where is EFN going to be applied?
•
•
•
•
Change in cash or marketable securities
Change in long-term investment securities
Change in long-term, interest bearing debt
Change in dividends or treasury stock repurchases
• Now the Pro Forma Balance Sheet can be constructed
Michael Dimond
School of Business Administration
Other IS Items
•
•
•
•
Interest Expense
Interest Income
Income Taxes
Net Income
• Now the Pro Forma Income Statement can be
constructed
Michael Dimond
School of Business Administration
Dividends & Change in Retained Earnings
• Dividend Policy
• Change in RE = NI – Dividends
• Now the Pro Forma Statement of Retained
Earnings can be constructed
Michael Dimond
School of Business Administration
Statement of Cash Flows
• Cash Flows from Operations
• Cash Flows from Investing
• Cash Flows from Financing Activities
Michael Dimond
School of Business Administration
Building the Statement of Cash Flows
Michael Dimond
School of Business Administration
Michael Dimond
School of Business Administration
From here, we can compute Free Cash Flows
Michael Dimond
School of Business Administration
Assumptions
•
•
•
•
What assumptions are we making about PepsiCo?
How can we test each?
What segments for sales are you using?
How are you attributing growth to
volume & price?
• What is PepsiCo’s relationship between
sales & assets?
• What about costs of raw materials?
Michael Dimond
School of Business Administration
Pepsico
PepsiCo Americas Foods
FLNA
Lorraine Chow Hansen, President-Global Snacks
QFNA
Becerra Jose Luis Prado, President-Quaker Foods North America
LAF
Olivier M. Weber, President-South America & Central America Foods
PepsiCo Americas Beverages
PAB
Bradley Jakeman, President-Global Beverage Group
Luis Montoya, President-Latin America Beverages
PepsiCo Europe
Europe
Eugene Willemsen, President-South East Europe Region
PepsiCo Asia, Middle East and Africa
AMEA
Sanjeev Kumar Chadha, Chief Executive Officer-Asia, Middle East & Africa
Ramon Laguarta, President-Developing & Emerging Markets
All PEP company executives
source: http://quotes.wsj.com/PEP/company-people
Indra K. Nooyi, Chairman & Chief Executive Officer
Zein Abdalla, President
Hugh F. Johnston, Chief Financial Officer & Executive Vice President
Mehmood Khan, Chief Scientific Officer & Executive VP
Robert L. Dixon, Chief Information Officer & Senior Vice President
Kelly Mahon Tullier, Senior Vice President & Deputy General
Michael Dimond
School of Business Administration
Pepsico
Net Revenue Contribution
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
CAGR
Operating Profit
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
CAGR
FLNA
9,091
9,560
10,322
10,844
11,586
12,507
12,421
12,573
13,322
13,574
PBNA
7,733
8,313
9,146
PI
8,678
9,862
11,376
5%
FLNA
2,242
2,389
2,529
2,615
2,845
2,959
3,105
3,376
3,621
3,646
6%
QFNA
1,467
1,526
1,718
1,769
1,860
1,902
2,687
2,656
2,656
2,636
LAF
PAB
UKEU
MEAA
3,972
4,872
5,895
5,703
6,315
7,156
7,780
10,362
11,090
10,937
10,116
20,401
22,418
21,408
4,750
3,440
Europe
AMEA
5,896
6,891
7,028
9,602
13,560
13,441
4,170
5,119
5,277
6,291
7,392
6,653
Divested Business
2
0
0
0
7%
PBNA
1,690
1,911
2,037
PI
1,061
1,323
1,607
QFNA
470
475
537
554
568
582
781
741
797
695
4%
Total
26,969
29,261
32,562
35,137
39,474
43,251
43,232
57,838
66,504
65,492
10%
LAF
655
714
897
904
1,004
1,078
1,059
PAB
2,315
2,487
2,026
2,172
2,776
3,273
2,937
UKEU
700
MEAA
Europe
Restructuring
Corporate
AMEAUnallocated
& Impairment Charges
401
855
910
948
1,054
1,210
1,330
466
592
700
708
887
747
-689
-788
-738
-753
-1,007
-566
-1,327
-1,233
-1,302
-150
0
0
Total
4,781
5,259
5,984
6,502
7,182
6,959
8,044
8,332
9,633
9,112
7%
Michael Dimond
School of Business Administration
Pepsico
HOW IS THIS TABLE BUILT?
The table below shows the dollar values and the total percent change, then attributes dollar difference to four causes: Change in volume, in pricing, in FX translation and from acquisitions and divestitures.
The percent allocated to each cause is a proportion of the total % change based on the dollar value attributed to each. Consider FLNA & LAF as examples:
LAF as stated
FLNA as stated $ equivalent
8.72% increase
624 increase
7780
1.89% increase
252 increase
13574
Net Revenue, 2012
7156
13322
Net Revenue, 2011
% Impact of:
277 4/9 of $ due to volume
4%
-126 -1/2 of $ due to volume
-1%
Volume
693 10/9 of $ due to price
10%
3/2 of $ due to price
378
3%
Effect net pricing
-485 -7/9 of $ due to FX
-7%
0/2 of $ due to FX
0
0%
Foreign exchange translation
2/9 of $ due to Acq.
139
2%
0/2 of $ due to Acq.
0
0%
Acquisitions and divestitures
624 sum of $ total increase
9%
252 sum of $ total increase
2%
Reported Growth
From the footnotes, the % change in volume appears to be adjusted for the effect of acquisitions & divestitures, but otherwise is an increase in actual servings
Use the % change in volume as given in these tables from the 10-k.
Michael Dimond
School of Business Administration
Pepsico
Volume effect on net revenue
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
Geometric Avg
FLNA
3.0%
0.0%
1.0%
0.0%
2.0%
-1.0%
0.5%
"In 2012, total servings increased
3% compared to 2011. Excluding the
impact of the 53rd week, total
servings also increased 3%
compared to 2011. In 2011, total
servings increased 6% compared to
2010. Excluding the impact of the
53rd week, total servings increased
5% compared to 2010. 2012 and
2011 servings growth reflects an
adjustment to the base year for
divestitures that occurred in 2012
and 2011, as applicable."
QFNA
2.0%
-1.5%
0.0%
0.0%
-5.0%
-1.0%
-1.5%
"In 2011, total servings
increased 6% compared to
2010. Excluding the impact of
the 53rd week, total servings
increased 5% compared to
2010. In 2010, total servings
increased 7% compared to
2009. 2011 servings growth
reflects an adjustment to the
base year (2010) for divestitures
that occurred in 2011, as
applicable. "
LAF
PAB
5.0%
-1.0%
0.0%
-4.5%
-2.0%
-7.0%
3.0%
n/a
3.5%
n/a
4.0%
-3.0%
2.1% #VALUE!
UKEU
4.0%
"In 2010, total servings
increased 7% compared to
2009, as servings for snacks
increased 2% while servings
for beverages increased 9%.
In 2009, total servings
increased slightly compared
to 2008, as servings for
snacks increased 1% while
servings for beverages
MEAA
12.0%
Europe
AMEA
4.0%
-3.0%
n/a
n/a
0.0%
#VALUE!
14.0%
7.0%
12.0%
10.0%
8.0%
9.2%
from table
from notes
Total
3.0%
1.0%
-1.0%
n/a
n/a
0.0%
Total
3%
0%
7%
6%
3%
4.0%
"In 2009, total servings
increased slightly compared to
2008, as servings for snacks
increased 1% while servings
for beverages decreased 1%.
In 2008, total servings
increased 3% compared to
2007, as servings for both
snacks and beverages
worldwide grew 3%."
Michael Dimond
School of Business Administration
The Right Tax Rate to Use
• The choice really is between the effective and the
marginal tax rate. In doing projections, it is far safer to
use the marginal tax rate since the effective tax rate is
really a reflection of the difference between the
accounting and the tax books.
– What about GE and their zero tax liability?
• By using the marginal tax rate, we tend to understate
the after-tax operating income in the earlier years, but
the after-tax tax operating income is more accurate in
later years
• If you choose to use the effective tax rate, adjust the
tax rate towards the marginal tax rate over time.
Michael Dimond
School of Business Administration
Expected FCF
• Forecast, then Recast
– Start by predicting what is likely to be published on the financial
statements.
– After that, recast the figures to better reflect the economic realities for
operating leases, R&D (if applicable) and sustainability of operating
cash flows.
• Compute FCFs using more than one formula to ensure you
have found all the issues in your figures.
Michael Dimond
School of Business Administration
Michael Dimond
School of Business Administration