Oracle Corporation (ORCL)

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 ability to control its costs are important elements of future performance. You need to explainthe company's performance in the baseline scenario, as well as justify sales and expensesgrowth rates. You canpredict the growth rate by using the 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.
o 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 given the analysis you have done in part 1. Be sure to justify your sales growth rate!

o 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?

o 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.

o You will compute the tax obligation directly from earnings before taxes implied by your estimates using a tax rate of 38%.
o Calculate net income for each year, and include the table in your report.

Oracle Corporation (ORCL) Forecasting Free Cash Flow (see sectio...