1. 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

2. 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

3. 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)

4. 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)

5. 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.

6. 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

7. 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.

8. 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”

9. 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.

10. Tool > Data Analysis > Regression > OK Then provide information to the empty cells Ex) S&P 500 and a company - coefficient of market is beta