1. Valuation FIN 449 Michael Dimond

2. Michael Dimond School of Business Administration 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?

3. 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.

4. Michael Dimond School of Business Administration Forecasting most line items is a simple process Is there evidence of a rule or guideline management has been using? (e.g. SG&A is always 3% of sales, or payables period is always 29 days) Is there a logical relationship with another item (e.g. Accounts receivable will grow at the same rate as sales)? Some items require more depth of analysis than others There may be more influence of one particular item on free cash flows (e.g. reinvestment in operating assets) There may be more sensitivity to forecasting errors (e.g. If sales are 1% lower than you predict, by what percent will operating income change?) Most forecasts use sales as a base Sales for the company may be managed in segments Understanding how a firm manages a process allows us to better model it How detailed should a revenue forecast be? At the least, you should consider the effect of volume and price in forecasts

5. Michael Dimond School of Business Administration

24. Projecting Operating Expenses

25. Michael Dimond School of Business Administration

28. The simple approach is good, and many companies put huge efforts into managing their direct costs Vendor negotiations Supply chain management Efficiency projects

29. Michael Dimond School of Business Administration

31. Do A/R and Inventory have stable turnover rates?

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38. Does Accounts Payable have a stable turnover?

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49. Assumptions What assumptions are we making about a company? How can we test each assumption? What segments for sales are you using? How are you attributing growth to volume & price? What is the firm’s relationship between sales & assets? What about costs of raw materials or other inputs?

50. Michael Dimond School of Business Administration Pepsico

51. Michael Dimond School of Business Administration Pepsico

52. Michael Dimond School of Business Administration Pepsico

53. Michael Dimond School of Business Administration Pepsico

54. Michael Dimond School of Business Administration How deep of an analysis is necessary? A company like Pepsico provides enough data to model each division thoroughly

55. Michael Dimond School of Business Administration Pepsico overall

56. Michael Dimond School of Business Administration Pepsico FLNA

57. Michael Dimond School of Business Administration Pepsico QFNA

58. Michael Dimond School of Business Administration Pepsico LAF

59. Michael Dimond School of Business Administration Pepsico PAB

60. Michael Dimond School of Business Administration Pepsico Europe

61. Michael Dimond School of Business Administration Pepsico AMEA

62. Michael Dimond School of Business Administration Pepsico Corporate Unallocated