Forecasting Free Cash Flow (see sections 19.2 and 19.3 for reference): In this section, you are going to determine a baseline scenario (what your group feels is most likely to happen) to forecast future cash flow to the firm, then estimate future cash flow to the firm. The company's growth rates and the ability to control its costs are important elements of future performance. You need to explain the company's performance in the baseline scenario, as well as justify sales and expense growth rates. You can predict the growth rate by using previous years' financial statements. In coming up with a realistic baseline scenario, the notes to the 10-Ks will be useful. They should also alert you to important things such as possibilities of litigation or new ventures.
•Start off with the income statement. You will estimate unlevered net income for the next 5 years (2016-2021) according to estimates regarding: sales, cost of goods sold, operating expenses, depreciation, and income tax (assume a tax rate of 38%). Interest expenses are excluded.
- Estimate sales each year by using a sales growth rate, i.e.Salest=Salest−1*(1+g). You can calculate a sales growth rate directly, or assume one is given the analysis you have done in part 1. Be sure to justify your sales growth rate!
-The easiest way to estimate expenses is as a percentage of sales. Check the common size adjustments to your income statement from previous years to get an idea regarding what percent of sales corresponds to each expense. Adjust accordingly, i.e. do you expect expenses to increase relatively on an annual basis?
- Depreciation will depend on capital expenditures and the schedule used to depreciate fixed assets. This is extremely difficult for an analyst to estimate. You can infer it as a percentage of sales as you did with expenses, but be sure to adjust accordingly if you expect the firm to make large capital expenditures in the near future.
-You will compute the tax obligation directly from earnings before taxes implied by your estimates using a tax rate of 38%.
-Calculate net income for each year, and include the table in your report.
These solutions may offer step-by-step problem-solving explanations or good writing examples that include modern styles of formatting and construction of bibliographies out of text citations and references. Students may use these solutions for personal skill-building and practice. Unethical use is strictly forbidden.In order to estimate the growth rate of sales, simple average has been used of the past 5 year sales growth rate and predicted long term growth rate by Reuters analysts. The sales growth over the last 5 years was 7.34% and it...
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