• Used for
– valuing firms
– granting credit
– acquiring companies
– planning strategy
– budgeting
• More art than science

• Typically, start with sales forecast
– fundamental factor determining firm’s future
– drives other variables in firm
• Generally start with historic growth rates
– Break down by industry/geographic segment
– Adjust for know economic changes (e.g., Asia)
– Asymptote to steady-state economy growth
– E.g., Coke sales will grow 5% in 2003, and then grow
4.5% through 2004 and 4% thereafter

• Cost of goods sold and S,G&A
– typically percentage of sales
– based on adjusted historic %
– Coke CGS will be 30% going forward
– Coke SGA will be 40% going forward
• Interest is based on expected debt
– assumed constant $199 for Coke case
• Income tax expense is based on tax rates applied to pretax income
– Coke’s will be 27% going forward

• Accounts Receivable tie to sales and terms
– use accounts receivable turnover (or percent of sales)
• Inventories tie to cost of goods sold
– use inventory turnover (or percent of sales)
• Accounts payable tie to purchases and terms (or percent of sales)
• Other working capital typically ties to sales
• For convenience, we will assume
– Cash remains at constant percentage of sales
– Noncash WC of $750 in 2002, $850 in 2003 and growth with sales thereafter

• PP&E
– capital expenditures tie lead sales growth
• $950 in 2002, $1,100 in ‘03, with sales growth thereafter
– depreciation is based on capital expenditures
• 80% of capital expenditures
• Stock issuance/repurchase and long-term debt tie to capital needs
– Coke repurchases with excess cash

• Dividends are a percent of earnings
– 45% going forward
• Retained earnings ties to dividends and net income
• We will assume all excess cash is used to repurchase shares

• Statement of cash flows follows from:
– income statement
– balance sheet
• Warning!!! Check frequently to ensure your numbers make sense