Statement
Analysis
K R Subramanyam
John J Wild
McGraw-Hill/Irwin
9-2
Prospective Analysis
CHAPTER
9-3
Prospective Analysis
Importance
Security
SecurityValuation
Valuation -- free
freecash
cashflow
flow and
andresidual
residual
income
incomemodels
models require
requireestimates
estimatesof
of future
futurefinancial
financial
statements.
statements.
Management
ManagementAssessment
Assessment -- forecasts
forecastsof
offinancial
financial
performance
performanceexamine
examinethe
theviability
viabilityof
ofcompanies
companies
strategic
strategicplans.
plans.
Assessment
Assessmentof
ofSolvency
Solvency--useful
usefulto
tocreditors
creditorsto
to
assess
assessaacompanys
companysability
ability to
tomeet
meet debt
debt service
service
requirements,
requirements,both
bothshort-term
short-term and
andlong-term.
long-term.
9-4
2)
2)Expected
Expectedlevel
levelof
ofmacroeconomic
macroeconomicactivity
activity
3)
3)The
Thecompetitive
competitivelandscape
landscape
4)
4)New
New versus
versusold
old store
storemix
mix(strategic
(strategic
initiatives)
initiatives)
9-5
9-6
Project sales
Project cost of goods sold and gross profit margins using
historical averages as a percent of sales
Project SG&A expenses using historical averages as a
percent of sales
Project depreciation expense as an historical average
percentage of beginning-of-year depreciable assets
Project interest expense as a percent of beginning-ofyear interest-bearing debt using existing rates if fixed
and projected rates if variable
Project tax expense as an average of historical tax
expense to pre-tax income
9-7
9-8
9-9
9-10
9-11
9-12
9-13
9-14
9-15
9-16
9-17
The
Theresidual
residualincome
incomevaluation
valuationmodel
modeldefines
definesequity
equityvalue
value
at
attime
timettas
asthe
thesum
sumof
ofcurrent
currentbook
bookvalue
valueand
andthe
thepresent
present
value
valueof
ofall
allfuture
futureexpected
expectedresidual
residualincome:
income:
where
whereBV
BVt tisisbook
bookvalue
valueat
atthe
theend
endofofperiod
periodt,t,RI
RIt +t +nnisisresidual
residualincome
incomeinin
period
periodt t++n,n,and
andkkisiscost
costofofcapital
capital(see
(seeChapter
Chapter1).
1).Residual
Residualincome
incomeatat
time
timet tisisdefined
definedas
ascomprehensive
comprehensivenet
netincome
incomeminus
minusaacharge
chargeon
on
beginning
beginningbook
bookvalue,
value,that
thatis,
is,RI
RIt ==NI
NIt --(k(kxxBV
BVt - 1).).
t
t-1
9-18
-Sales
-Salesgrowth.
growth.
-Net
-Netprofit
profit margin
margin(Net
(Netincome/Sales).
income/Sales).
-Net
-Networking
workingcapital
capitalturnover
turnover (Sales/Net
(Sales/NetWC).
WC).
-Fixed-asset
-Fixed-asset turnover
turnover (Sales/Fixed
(Sales/Fixedassets).
assets).
-Financial
-Financialleverage
leverage(Operating
(Operatingassets/Equity).
assets/Equity).
-Cost
-Cost of
ofequity
equitycapital
capital
9-19
9-20
9-21
9-22
9-23