1. VALUATION MEASURING AND MANAGING THE VALUE OF COMPANIES
FORECASTING PERFORMANCE
PREPARED BY
DAVID DAI

2. Determine Length and Detail of the Forecast
All continuing value approaches are based on an assumption of steady state performance.
Constant Rate of Return on all new capital invested during the continuing value period
The company earn a constant return on its base level of invested capital
The company grows at a constant rate and reinvests a constant proportion of its operating profits in the business each year.

3. - Continued Recommend using a forecast period of 10 to 15 years
A detailed forecast for 3 to 5 years.
In addition to simplifying the forecast, this approach also forces you to focus on the long-term economics of the business, not just the individual line items of the forecast.

4. Develop Strategic Perspective
- Means crafting a plausible story about the company’s future performance.
What ultimately drives the value of the company is the assessment of whether and for how long a company can earn returns in excess of its opportunity cost of capital.
superior value to customer through a combination of price and product
Achieve lower costs than competitors
Using capital more productively than competitors.

5. Industry Structure Analysis
Five Force Model
Suppliers
- Substitute products
- Buyers
Entry of new competitors
Entry of existing competitors

6. Customer Segmentation Analysis
External Shock
Structure
Conduct
Performance
Feedback
Macroeconomics
Technology
Regulation
Customer Preference/Demographics

7. Competitive Business System Analysis
Product design
and development
Procurement
Manufacturing
Marketing
Sales and
Distribution
Product attributes; quality; Time to market; Technology
Pricing;
Advertising
Promotion
Packaging
Brands
Access to
Sources cost
Outsourcing
Sales
Effective
Costs
Channels
Costs Cycle
Time;
Quality

8. Translate the Strategic Perspective into Financial Forecast
Build the revenue forecast
Forecast operational items, such as operating cost.
Project non-operating items.
Project the equity accounts.
Use the cash and/or debt accounts to balance the cash flows and balance sheet.
Calculate the ROIC tree and key ratios to pull the elements together and check for consistency.
Such as operating cost, working capital, property,
Plant, and equipment, by linking them to revenues
or volume
Equity should equal last year’s equity plus net income
And new share issues less dividends and share repurchases.

9. Inflation Expected inflation = (1+Nominal rate)/(1+ Real rate) - 1
Forecast and cost of capital could be estimated in nominal rather than real currency uits.
For consistency, both the financial forecast and the cost of capital must be based on the same expected general inflation rate.
This means inflation rate built into the forecast must be derived from an inflation rate implicit in the cost cost of capital.

10. Develop Performance Scenarios
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Once the scenarios are developed, an overall value of the
Company can be estimated. This will involve a weighted
Average of the values of the independent scenarios,
Assigning probabilities to each scenario.

11. Checking for Consistency and Alignment
Is performance on the value drivers consistent with the company’s economics and the industry competitive dynamics?
Is revenue growth consistent with industry growth?
Is the return on capital consistent with the industry’s competitive structure?
How will technology changes affect returns? Will they affect risk?
Can the company manage all the investment it is undertaking?

12. Some Data to Guide your forecast
Companies rarely outperform their peers for long periods of time.
Company performance varies from industry averages.
Industry average ROICs and growth rate are linked to economic fundamentals.

13. CASE STUDY