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Prospective analysis
Is the final step in the financial statement
analysis.
Is a central component of value investing
Includes forecasting of the balance sheet,
income statement and statement of cash
flow
projected financial statements are primarily
based on expected relations between
income statement and balance sheet.
Prospective Analysis
Importance
Security Valuation - free cash flow and residual
income models require estimates of future financial
statements.
The
Projectio
n Process
2 Step Process:
1) Project initial cash balance
2) Increase (decrease) liabilities and equity
as necessary to achieve historical
percentage of cash to total assets. Fund
(repay) with historical proportion of debt
and equity.
Value Drivers
The Residual Income valuation model defines residual
income as:
RIt
= Nit (k X BVt-1)
= (ROEt k) X BVt-1
Value Drivers
Reversion of ROE
Value Drivers
Value Drivers
Short-Term Forecasting