ACF5130 Financial statement analysis and business valuation
Week 8: Forecasting Tutorial Discussion Questions
Discussion Question 1: Projecting a growth rate
Samantha, a financial analyst, is evaluating the future performance of TechnoInnovate, a company that produces innovative electronic devices. As part of her analysis, Samantha is forecasting the company's revenue for the next financial year. TechnoInnovate has recently launched a new product line, which is expected to complement its existing offerings. Given the data below, how should Samantha forecast TechnoInnovate's revenue for the next financial year?
• TechnoInnovate's revenue for the current financial year is $150 million.
• The company has historically seen a year-over-year revenue growth rate of 10%.
• Market research suggests the new product line could increase the company's overall revenue growth rate by an additional 5%.
• An upcoming change in regulation for electronic devices is expected to reduce the growth rate by 2%.
Options:
A) Forecast next year's revenue by applying the historical growth rate of 10% to the current revenue, without accounting for the new product line or regulatory changes.
B) Calculate next year's revenue by adding the impact of the new product line to the historical growth rate (10% + 5%), then applying this adjusted growth rate to the current revenue.
C) Forecast revenue based on the expected increase in the customer base from the new product line, adjusting for market contraction due to regulatory changes. This method focuses on changes in the volume of sales rather than applying percentage-based growth rates to the previous year's revenue.
D) Calculate next year's revenue by applying a combined growth rate that incorporates the historical growth, the additional growth from the new product line, and the negative impact of regulatory changes to the current revenue.
Discussion Question 2: Forecasting Leases
Star Grocers Ltd has recently adopted the new lease standard (AASB 16/IFRS 16), which has impacted its financial reporting from 2020 onwards. The company’s financial statements from 30 June 2019 to 30 June 2024 are provided below.
Required:
1. How did the adoption of the new lease standard affect Star Grocers Ltd's financial statements?
2. If you wanted to compare the 2019 figures with the 2020 figures, how would you adjust the figures to ensure a like-for-like comparison?
3. Assume Star Grocers Ltd’s annual sales will grow by 5% for the next three years. Based on this growth assumption, forecast the lease assets, lease liabilities, lease depreciation and lease interest expense for the next three years (2025–2027):
Discussion Question 3: Forecasting Financial Statements
The following exhibit (all figures in $ million) shows the Balance Sheets of XYZ Inc for the years ended 31 December 2021 and 31 December 2022 respectively.
The firm’s income tax rate is 35%. The firm reported $15 million in interest income and $98 million in interest expense for 2022. Sales revenue was $3,726 million. Sales revenue is forecasted to grow at a 6% rate per year in the future, on a constant asset turnover of 0.65. Operating profit margins of 14% are expected to be earned each year. Further, financial assets and financial liabilities will grow at 10% annually, and accounts payable will grow at 6%.
Required:
Forecast the return on net operating assets (RNOA) for 2023. Define RNOA as net operating income divided by the closing value of net operating assets for that year.