Question 1

Which is the recommended way to forecast items such as inventory and accounts payable?

Accepted Answer

A) Inventory and accounts payable should be forecasted based on revenues,since most other working capital items are forecasted based on revenues. 
B) Inventory and accounts payable should be forecasted based on COGS,because these items are more correlated with input prices than with output prices. 
C) Inventory and accounts payable should be the plug once total operating assets and operating liabilities have been forecasted. 
D) Inventory and accounts payable should be forecasted based on total assets,as these tend to scale together. 
A) Inventory and accounts payable should be forecasted based on revenues,since most other working capital items are forecasted based on revenues. 
B) Inventory and accounts payable should be forecasted based on COGS,because these items are more correlated with input prices than with output prices. 
C) Inventory and accounts payable should be the plug once total operating assets and operating liabilities have been forecasted. 
D) Inventory and accounts payable should be forecasted based on total assets,as these tend to scale together. B

Question 2

List the three steps in making a top-down forecast of revenue and the three inputs for making a bottom-up forecast of revenue.

Accepted Answer

Top-down forecast:
Step 1:Size the whole market.
Step 2:Determine market share.
Step 3:Forecast prices.
Bottom-up forecast:
Input 1:Estimate demand from existing customers.
Input 2:Estimate customer turnover.
Input 3:Estimate potential for new customers.

Question 3

Changing the dividend payout ratio will change the value of the firm and the firm's equity.

Accepted Answer

A) True 
 B)False  False

Question 4

Which of the following is the recommended approach to forecast COGS,and why?

Accepted Answer

A) Forecast COGS based on revenue growth,since it provides flexibility in the model. 
B) Forecasting COGS based on the forecast ratio of COGS to sales allows for possible improvements in COGS relative to sales. 
C) Forecast COGS based on revenue growth since COGS and revenues have a direct relationship. 
D) Forecasting COGS based on inventory is recommended because inventory prices and COGS are correlated. 
A) Forecast COGS based on revenue growth,since it provides flexibility in the model. 
B) Forecasting COGS based on the forecast ratio of COGS to sales allows for possible improvements in COGS relative to sales. 
C) Forecast COGS based on revenue growth since COGS and revenues have a direct relationship. 
D) Forecasting COGS based on inventory is recommended because inventory prices and COGS are correlated.

Question 5

It is recommended in the financial modeling process to collect raw data on a separate worksheet and record the data as originally reported.

Accepted Answer

A) True 
 B)False

Question 6

Complete the following table by entering the typical forecast driver in the third column and the typical forecast ratio in the last column.
 $\begin{array}{|l|l|l|l|}
\hline  \text {Typical Forecast Drivers for the }\  \text { Income Statement }\
\hline & \text { Line item } & \text { Typical forecast driver } & \text { Typical forecast ratio } \
\hline \text { Operating } & \text { Cost of goods sold (COGS) } & & \
\hline & \text { Selling, general, and } & & \
& \begin{array}{l}
\text { administrative expense } \
\text { (SG\&A) }
\end{array} & & \
\hline & \text { Depreciation } & & \
\hline \text { Nonoperating } & \text { Interest expense } & & \
\hline & \text { Interest income } & & \
\hline
\end{array}$

Accepted Answer

The answer of Complete the following table by entering the...

Question 7

Large Corporation owns less than 20 percent of Small Corporation.Which of the following are true?
I.Large Corp.records asset sales of Small Corp.
II.The investment in Small Corp.is marked to market.
III.Large Corp.records dividends received from Small Corp.
IV.In forecasting entries for Small Corp. ,Large Corp.should use a traditional driver like cash flows.

Accepted Answer

A) I and II only. 
B) I and III only. 
C) II and III only. 
D) III and IV only. 
A) I and II only. 
B) I and III only. 
C) II and III only. 
D) III and IV only.

Question 8

Since severance costs are a cost of doing business,they should be forecast within free cash flows.

Accepted Answer

A) True 
 B)False

Question 9

The recommended approach for forecasting cash flows of a parent company arising from investments in subsidiaries where the parent owns less than 20 percent of the subsidiary is to use the relationship between income from these subsidiaries and overall firm revenues.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following are true concerning forecasting interest income?
I.It is a nonoperating measure.
II.Its typical forecast driver is revenue.
III.It is typically the same from year to year for firms that generate high cash flow.
IV.The typical forecast ratio is interest income in the current period divided by excess cash in the previous period.

Accepted Answer

A) I and II only. 
B) I and IV only. 
C) II and III only. 
D) III and IV only. 
A) I and II only. 
B) I and IV only. 
C) II and III only. 
D) III and IV only.

Question 11

In forecasting the income statement,it is recommended to tie all items directly to revenue.

Accepted Answer

A) True 
 B)False

Question 12

In industries where prices are changing or technology is advancing,forecasters should:

Accepted Answer

A) Use only financial drivers such as revenue. 
B) Use only nonfinancial drivers such as productivity and volume. 
C) Use both financial and nonfinancial drivers. 
D) Use national real aggregates such as real GDP. 
A) Use only financial drivers such as revenue. 
B) Use only nonfinancial drivers such as productivity and volume. 
C) Use both financial and nonfinancial drivers. 
D) Use national real aggregates such as real GDP.

Question 13

The top-down approach cannot be applied to companies in mature industries.

Accepted Answer

A) True 
 B)False

Question 14

To forecast the balance sheet,it is best to first forecast invested capital and nonoperating assets and then forecast excess cash and sources of financing separately.

Accepted Answer

A) True 
 B)False

Question 15

A bottom-up approach for forecasting revenues relies on projections of customer demand.

Accepted Answer

A) True 
 B)False

Question 16

If a company forecasts that its capital expenditures will be smooth,then in forecasting depreciation,it is better to use the percentage of revenues approach than the percentage of property,plant,and equipment (PP&E )approach.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following is the best recommendation for forecasting performance?

Accepted Answer

A) Use an explicit forecast period of two to five years and longer for cyclical companies or those experiencing very rapid growth. 
B) Use an explicit forecast period of two to five years and shorter for cyclical companies or those experiencing very rapid growth. 
C) Use an explicit forecast period of 10 to 15 years and longer for cyclical companies or those experiencing very rapid growth. 
D) Use an explicit forecast period of 10 to 15 years and shorter for cyclical companies or those experiencing very rapid growth. 
A) Use an explicit forecast period of two to five years and longer for cyclical companies or those experiencing very rapid growth. 
B) Use an explicit forecast period of two to five years and shorter for cyclical companies or those experiencing very rapid growth. 
C) Use an explicit forecast period of 10 to 15 years and longer for cyclical companies or those experiencing very rapid growth. 
D) Use an explicit forecast period of 10 to 15 years and shorter for cyclical companies or those experiencing very rapid growth.

Question 18

The explicit forecast period must be long enough for the company to reach a steady state.Which of the following is NOT a desirable property of that steady state?

Accepted Answer

A) The growth rate rises above the required return on capital. 
B) The company earns a constant rate of return on existing capital. 
C) The company earns a constant rate of return on new capital invested. 
D) The company reinvests a constant proportion of its operating profits into the business each year. 
A) The growth rate rises above the required return on capital. 
B) The company earns a constant rate of return on existing capital. 
C) The company earns a constant rate of return on new capital invested. 
D) The company reinvests a constant proportion of its operating profits into the business each year.

Question 19

Which of the following is NOT one of the steps in the forecast of individual line items related to the income statement?

Accepted Answer

A) Determine the economic relationships that drive the model. 
B) Model the business cycle. 
C) Estimate the forecast ratios. 
D) Forecast the drivers and multiply times the respective ratios. 
A) Determine the economic relationships that drive the model. 
B) Model the business cycle. 
C) Estimate the forecast ratios. 
D) Forecast the drivers and multiply times the respective ratios.

Question 20

The recommended method to forecast taxes is as a percentage of earnings before taxes.

Accepted Answer

A) True 
 B)False

Exam 11: Forecasting Performance

Which is the recommended way to forecast items such as inventory and accounts payable?

List the three steps in making a top-down forecast of revenue and the three inputs for making a bottom-up forecast of revenue.

Changing the dividend payout ratio will change the value of the firm and the firm's equity.

Which of the following is the recommended approach to forecast COGS,and why?

It is recommended in the financial modeling process to collect raw data on a separate worksheet and record the data as originally reported.

Since severance costs are a cost of doing business,they should be forecast within free cash flows.

The recommended approach for forecasting cash flows of a parent company arising from investments in subsidiaries where the parent owns less than 20 percent of the subsidiary is to use the relationship between income from these subsidiaries and overall firm revenues.

In forecasting the income statement,it is recommended to tie all items directly to revenue.

In industries where prices are changing or technology is advancing,forecasters should:

The top-down approach cannot be applied to companies in mature industries.

To forecast the balance sheet,it is best to first forecast invested capital and nonoperating assets and then forecast excess cash and sources of financing separately.

A bottom-up approach for forecasting revenues relies on projections of customer demand.

If a company forecasts that its capital expenditures will be smooth,then in forecasting depreciation,it is better to use the percentage of revenues approach than the percentage of property,plant,and equipment (PP&E )approach.

Which of the following is the best recommendation for forecasting performance?

The explicit forecast period must be long enough for the company to reach a steady state.Which of the following is NOT a desirable property of that steady state?

Which of the following is NOT one of the steps in the forecast of individual line items related to the income statement?

The recommended method to forecast taxes is as a percentage of earnings before taxes.

Why Value Value

Fundamental Principles of Value Creation

Conservation of Value and the Role of Risk

The Alchemy of Stock Market Performance

The Stock Market Is Smarter Than You Think

Return on Invested Capital

Growth

Frameworks for Valuation

Reorganizing the Financial Statements

Analyzing Performance

Estimating Continuing Value

Estimating the Cost of Capital

Moving From Enterprise Value to Value Per Share

Analyzing the Results

Using Multiples

Valuation by Parts

Taxes

Non-operating Items, Provisions, and Reserves

Leases and Retirement Obligations

Alternative Ways to Measure Return on Capital

Inflation

Cross-Border Valuation

Case Study: Heineken

Corporate Portfolio Strategy

Performance Management

Mergers and Acquisitions

Divestitures

Capital Structure, Dividends, and Share Repurchases

Investor Communications

Emerging Markets

Valuing High-Growth Companies

Cyclical Companies

Banks

Flexibility

Filters