Question

1.) Please describe the difference between a forecast and a projection.

2.) What factors should you review when evaluating a forecast provided by management and why?

3.) What are the proper steps in preparing a forecast.

4.) Describe techniques for sales forecasting.

5.) What are the applicable standards related to forecasts.

6.) What role do forecasts play in court.

7.) Describe what the Market Approach is.

8.) What is the guideline public company method?

9.) What are the methods for analyzing guideline companies?

10.) List and describe the valuation multiples and their use in the guideline public company method.

11) What are the pros and cons of using the guideline public company method?

12.) Discuss the Merger and Acquisition (Transaction) Method.

13.) What tools can be used for the M and A method?

14.) What are the pros and cons of using the M and A method?

Answer 1

1) A forecast is the responsible party’s assumptions reflecting the conditions it expects to exist and the course of action it expects to take. Basically it is an assumption. On the other hand, a projection is sometimes prepared to present one or more hypothetical courses of action for evaluation, as in response to a question.

2) The factors that should be reviewed when evaluating a forecast are the relevance and availability of historical data, the degree of accuracy desirable, the time period to be forecast, the cost/ benefit of the forecast to the company, and the time available for making the analysis. It is because the company should make best use of the available data and reduce cost.

3) The steps involved in preparing a forecast are as follows :-

i. Define Assumptions- The first step in the forecasting process is to define the fundamental issues impacting the forecast.

ii.Gather Information- All kind of data is collected to support the forecast process.

iii. Preliminary analysis- The analysis should include an examination of historical data and relevant economic conditions.

iv. Select Methods- Determine the quantitative or qualitative forecasting methods that will be used.

v. Implement Methods- Put into practice one or more of the forecasting methods.

   vi. Use Forecasts- This is the final step in forecasting. The purpose of a forecast is to inform and assist in decision-making.

4) Techniques for sales forecasting are survey of buyers intentions, opinion poll of sales force, expert opinion, market test method, projection of past sales, products in use analysis, industry forecast and share of the sales of the industry, statistical demand analysis and time series analysis.

i. Survey of buyers intentions- Under this method of sales forecasting, a list of all potential buyers are drawn up. Then, a face to face interview with a selected group of potential buyers is conducted. On the basis of the interview, the buyer's intentions are ascertained and an estimate of the sales of the products of the firm is made.

ii. Opinion poll of sales force- An opinion poll of the sales force is conducted under this method. On the basis of the opinion poll, an estimate of the sales of the firm is made.

iii. Expert opinion- The opinions of the experts are sought, and on that basis sales forecasts are made.

iv. Market test method- A company may conduct a direct market test, and on the basis of its outcome, sales forecast is made.

v. Projection of past sales- Under this method, the past year sales of the firm are studied, and by making certain changes in the last year’s sales.

vi. Products in use analysis-  A firm undertakes a census of a number of products or closely related brands already in use in the market, and on the basis of such a census, makes the sales forecast

vii. Industry forecast and share of the sales of the industry- A company estimates its sales by applying a certain percentage to the sales forecast of the whole industry.

viii. Statistical demand analysis- The important factors which are likely to cause variations in the sales, such as the population, disposable income in the hands of the people, the prices of the products, advertising programmes are analyzed, and on the basis of such an analysis, sales forecast is made by a firm for it products.

ix. Time series analysis- Under this approach of sales forecasting, long-term trends, cyclical changes, seasonal variations and irregular fluctuations in the sales of a concern are isolated, and the sales forecast is made on the basis of normal trends.

5) SAE 3400 is the applicable standards related to forecasts.

6) The forecast plays an important role in court. It can improve judgement.

7) The market approach is a method of determining the value of an asset based on the selling price of similar assets.

8) The Guideline Public Company Method is a method used to value private companies. It uses prices multiples from data on comparable public companies. The multiples are then adjusted to account for differences between the private firm we wish to value and the comparable firms.

9) The methods for analyzing guideline companies are the Guideline Transaction Method and the Guideline Public Company Method. These methods are used to value a company based on the pricing multiples observed for similar companies that were sold or are publicly-traded.

10) These are the valuation multiples :-

i. Enterprise value (EV) to gross revenue or net sales.

ii. EV to gross profit.

iii. EV to net income.

iv. EV to EBIT or EBITDA.

v. EV to hard assets or total business assets.

vi. EV to owners' equity.

11) Pros: It is straightforward and involves simple calculations,i t uses data that is real and public and It is not dependent on subjective forecasts.

Cons:

i. It is difficult to identify transactions or companies that are comparable. There is usually a lack of a sufficient number of comparable companies or transactions.

ii. It is less flexible compared to other methods.

iii. The method raises questions on how much data is available and how good the data is.

12) It is a seven step process. They are :-

i.Determine Growth Markets/Services

ii.Identify Merger and Acquisition Candidate

iii.Assess Strategic Financial Position and Fit

iv.Make a Go/No-Go Decision

v.Conduct Valuation

vi.Perform Due Diligence, Negotiate a Definitive Agreement, and Execute Transaction

vii.Implement Transaction and Monitor Ongoing Performance.

13) Tools used for M&A method :-

i. Virtual data rooms. M&A has placed less emphasis on physical location in recent years.

ii. Flexible, focused IT infrastructure.

iii. Outsourced finance and accounting options.

14) Pros : It adds more value to the combined entity than either individual company can produce on its own, It opens up new markets for both companies,  It is a cost-effective method to fuel expansion, It can create multiple growth opportunities.

Cons : It creates distress within the employee base of each organization,  It may increase the amount of debt that is owed, There can be differences in corporate culture that are not easy to consolidate, It isn’t a one person decision most of the time.