Valuation

ValuationFIN 449

Michael Dimond

Michael DimondSchool of Business Administration

Financial Forecasting

• Why might the simplest approach not work?• How detailed should be the analysis?• Does history tell the future?• How long of a trend should be observed?• Are the line items independent?• Is growth in a line item really growth in the firm?• Have earnings been manipulated in the past?• Are the cash flows sustainable – can the operation continue

this way?


General Guidelines for Good Forecasting• The steps are interdependent. Make adjustments in an order that

makes sense for the business model.– For example, revenue forecasts may first require forecasts of new

stores• The financial statements must interconnect

– For example, the change in depreciation on the BS should equal the depreciation expense for the year.

– Simple errors can be avoided if the spreadsheet is dynamic.• Allow for the firm’s need for capital in at least one account with a

“TBD” balance– For example, Extra Funds Needed (EFN) may come from debt or

somewhere else. What has been the firm’s history? What is likely to be its future?

• GIGO – Garbage In, Garbage Out– All assumptions must make sense historically, economically and

strategically. The forecast is only as good as the assumptions• Sensitivity Analysis will test key assumptions

– Those inputs which make the biggest difference when they change are those which require the most thought care and monitoring.


High-level Forecasting

• Projected Sales & Income Approach

• Projected Total Assets Approach

• Problems with these approaches?

YearSales Growth

RateProjected

SalesNet Profit

MarginProjected Net

Income0 26,935$

FC1 7.3% 28,901$ 10.2% 2,948$ FC2 7.3% 31,011$ 10.2% 3,163$ FC3 7.3% 33,275$ 10.2% 3,394$ FC4 7.3% 35,704$ 10.2% 3,642$ FC5 7.3% 38,310$ 10.2% 3,908$

YearAsset Growth

RateProjected Total

Assets0 21,695$

FC1 4.3% 22,628$ FC2 4.3% 23,601$ FC3 4.3% 24,616$ FC4 4.3% 25,674$ FC5 4.3% 26,778$


Maybe Something More Sophisticated?• Remember our friends at DuPont?

• What’s the Implied Growth Rate of Average Assets?

YearProjected

SalesAverage Asset Turnover Rate

Projected Average Total

Assets

Projected Beginning

Total Assets

Projected Ending Total

Assets

Implied % Change in

Total Assets0 26,935$ 21,695$

FC1 28,901$ 1.3 22,232$ 21,695$ 22,769$ 5.0%FC2 31,011$ 1.3 23,855$ 22,769$ 24,941$ 9.5%FC3 33,275$ 1.3 25,596$ 24,941$ 26,251$ 5.3%FC4 35,704$ 1.3 27,465$ 26,251$ 28,683$ 9.3%FC5 38,310$ 1.3 29,469$ 28,683$ 30,255$ 5.5%


• What problems exist with this approach?

YearAsset Growth

RateProjected Total

Assets0 21,695$

FC1 6.9% 23,191$ FC2 6.9% 24,791$ FC3 6.9% 26,501$ FC4 6.9% 28,329$ FC5 6.9% 30,283$

YearProjected Total

AssetsProjected Total

Liab. (60%)Projected

Equity (40%0

FC1 23,191$ 13,915$ 9,277$ FC2 24,791$ 14,875$ 9,916$ FC3 26,501$ 15,901$ 10,600$ FC4 28,329$ 16,997$ 11,332$ FC5 30,283$ 18,170$ 12,113$


Detailed Forecasting

• Project Operating Revenues• Project Operating Expenses• Project Operating Assets & Liabilities• Project Financial Need & Capital Structure• Build Pro Forma Balance Sheet• Project Other IS Items• Build Pro Forma Income Statement• Project Dividends & Change in Retained Earnings• Build Pro Forma Statement of Retained Earnings• Project Cash Flows from Operations, Investing &

Financing Activities• Build Statement of Cash Flows

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Adapted from Stickney et al, Financial Reporting and Statement Analysis


Operating Revenues

• Projecting Sales– Segments– Volume– Price

• Projecting Other Revenue– Watch for unusual gains, such as from the sale of assets (ask,

“is this a sustainable cash flow?”)

• Forecasting errors– Some assumptions will be incorrect, but the significance of

each needs to be understood.– For example, high DOL means more potential for forecasting

error. A small error in sales projections can lever up into larger errors in projected cash flows.


Projecting Sales


Overall Sales GrowthYear -2 Year -1 Year 0

Sales 23,385$ 25,185$ 26,935$ Growth 7.7% 6.9%CAGR 7.3%




Sales Growth by SegmentYear -2 Year -1 Year 0

Snack Food SegmentSales 12,506$ 13,621$ 14,504$ Percent of Total SalesGrowthCAGR (in $)CAGR (in Sales Volume)CAGR (in Price)

Worldwide Beverage SegmentSales 8,886$ 9,592$ 10,440$ Percent of Total SalesGrowthCAGR (in $)CAGR (in Sales Volume)CAGR (in Price)

Subsidiary CompanySales 1,993$ 1,972$ 1,991$ Percent of Total SalesGrowthCAGR (in $)CAGR (in Sales Volume)CAGR (in Price)





Snack Food SegmentSales 12,506$ 13,621$ 14,504$ Percent of Total Sales 53.5% 54.1% 53.8%GrowthCAGR (in $)CAGR (in Sales Volume)CAGR (in Price)







Snack Food SegmentSales 12,506$ 13,621$ 14,504$ Percent of Total Sales 53.5% 54.1% 53.8%Growth 8.9% 6.5%CAGR (in $) 7.7%CAGR (in Sales Volume)CAGR (in Price)







Snack Food SegmentSales 12,506$ 13,621$ 14,504$ Percent of Total Sales 53.5% 54.1% 53.8%Growth 8.9% 6.5%CAGR (in $) 7.7%CAGR (in Sales Volume) 5.4%CAGR (in Price) 2.2%








Worldwide Beverage SegmentSales 8,886$ 9,592$ 10,440$ Percent of Total Sales 38.0% 38.1% 38.8%Growth 7.9% 8.8%CAGR (in $) 8.4%CAGR (in Sales Volume) 5.0%CAGR (in Price) 3.2%

Subsidiary CompanySales 1,993$ 1,972$ 1,991$ Percent of Total Sales 8.5% 7.8% 7.4%Growth -1.1% 1.0%CAGR (in $) -0.1%CAGR (in Sales Volume) -1.0%CAGR (in Price) 1.0%


Overall Sales GrowthYear -2 Year -1 Year 0 FC 1 FC 2 FC 3 FC 4 FC 5


Sales Growth by SegmentYear -2 Year -1 Year 0 FC 1 FC 2 FC 3 FC 4 FC 5








Snack Food SegmentSales 12,506$ 13,621$ 14,504$ Percent of Total Sales 53.5% 54.1% 53.8%Growth 8.9% 6.5%CAGR (in $) 7.7%CAGR (in Sales Volume) 5.4% 5.0% 5.0% 5.0% 5.0% 5.0%CAGR (in Price) 2.2% 2.0% 2.0% 2.0% 2.0% 2.0%







Snack Food SegmentSales 12,506$ 13,621$ 14,504$ Percent of Total Sales 53.5% 54.1% 53.8%Growth 8.9% 6.5%CAGR (in $) 7.7% 7.1% 7.1% 7.1% 7.1% 7.1%CAGR (in Sales Volume) 5.4% 5.0% 5.0% 5.0% 5.0% 5.0%CAGR (in Price) 2.2% 2.0% 2.0% 2.0% 2.0% 2.0%







Snack Food SegmentSales 12,506$ 13,621$ 14,504$ 15,534$ 16,637$ 17,818$ 19,083$ 20,438$ Percent of Total Sales 53.5% 54.1% 53.8%Growth 8.9% 6.5%CAGR (in $) 7.7% 7.1% 7.1% 7.1% 7.1% 7.1%CAGR (in Sales Volume) 5.4% 5.0% 5.0% 5.0% 5.0% 5.0%CAGR (in Price) 2.2% 2.0% 2.0% 2.0% 2.0% 2.0%








Worldwide Beverage SegmentSales 8,886$ 9,592$ 10,440$ Percent of Total Sales 38.0% 38.1% 38.8%Growth 7.9% 8.8%CAGR (in $) 8.4%CAGR (in Sales Volume) 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%CAGR (in Price) 3.2% 3.0% 3.0% 3.0% 3.0% 3.0%







Worldwide Beverage SegmentSales 8,886$ 9,592$ 10,440$ Percent of Total Sales 38.0% 38.1% 38.8%Growth 7.9% 8.8%CAGR (in $) 8.4% 8.2% 8.2% 8.2% 8.2% 8.2%CAGR (in Sales Volume) 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%CAGR (in Price) 3.2% 3.0% 3.0% 3.0% 3.0% 3.0%







Worldwide Beverage SegmentSales 8,886$ 9,592$ 10,440$ 11,291$ 12,211$ 13,206$ 14,283$ 15,447$ Percent of Total Sales 38.0% 38.1% 38.8%Growth 7.9% 8.8%CAGR (in $) 8.4% 8.2% 8.2% 8.2% 8.2% 8.2%CAGR (in Sales Volume) 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%CAGR (in Price) 3.2% 3.0% 3.0% 3.0% 3.0% 3.0%








Subsidiary CompanySales 1,993$ 1,972$ 1,991$ Percent of Total Sales 8.5% 7.8% 7.4%Growth -1.1% 1.0%CAGR (in $) -0.1%CAGR (in Sales Volume) -1.0% 0.0% 0.0% 0.0% 0.0% 0.0%CAGR (in Price) 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%







Subsidiary CompanySales 1,993$ 1,972$ 1,991$ Percent of Total Sales 8.5% 7.8% 7.4%Growth -1.1% 1.0%CAGR (in $) -0.1% 1.0% 1.0% 1.0% 1.0% 1.0%CAGR (in Sales Volume) -1.0% 0.0% 0.0% 0.0% 0.0% 0.0%CAGR (in Price) 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%







Subsidiary CompanySales 1,993$ 1,972$ 1,991$ 2,011$ 2,031$ 2,051$ 2,072$ 2,093$ Percent of Total Sales 8.5% 7.8% 7.4%Growth -1.1% 1.0%CAGR (in $) -0.1% 1.0% 1.0% 1.0% 1.0% 1.0%CAGR (in Sales Volume) -1.0% 0.0% 0.0% 0.0% 0.0% 0.0%CAGR (in Price) 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%



Sales 23,385$ 25,185$ 26,935$ 28,836$ 30,879$ 33,075$ 35,437$ 37,977$ Growth 7.7% 6.9%CAGR 7.3%




Subsidiary CompanySales 1,993$ 1,972$ 1,991$ 2,011$ 2,031$ 2,051$ 2,072$ 2,093$ Percent of Total Sales 8.5% 7.8% 7.4%Growth -1.1% 1.0%CAGR (in $) -0.1% 1.0% 1.0% 1.0% 1.0% 1.0%CAGR (in Sales Volume) -1.0% 0.0% 0.0% 0.0% 0.0% 0.0%CAGR (in Price) 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%



Sales 23,385$ 25,185$ 26,935$ 28,836$ 30,879$ 33,075$ 35,437$ 37,977$ Growth 7.7% 6.9%CAGR 7.3%


Snack Food SegmentSales 12,506$ 13,621$ 14,504$ 15,534$ 16,637$ 17,818$ 19,083$ 20,438$ Percent of Total Sales 53.5% 54.1% 53.8% 53.9% 53.9% 53.9% 53.8% 53.8%Growth 8.9% 6.5%CAGR (in $) 7.7% 7.1% 7.1% 7.1% 7.1% 7.1%CAGR (in Sales Volume) 5.4% 5.0% 5.0% 5.0% 5.0% 5.0%CAGR (in Price) 2.2% 2.0% 2.0% 2.0% 2.0% 2.0%

Worldwide Beverage SegmentSales 8,886$ 9,592$ 10,440$ 11,291$ 12,211$ 13,206$ 14,283$ 15,447$ Percent of Total Sales 38.0% 38.1% 38.8% 39.2% 39.5% 39.9% 40.3% 40.7%Growth 7.9% 8.8%CAGR (in $) 8.4% 8.2% 8.2% 8.2% 8.2% 8.2%CAGR (in Sales Volume) 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%CAGR (in Price) 3.2% 3.0% 3.0% 3.0% 3.0% 3.0%

Subsidiary CompanySales 1,993$ 1,972$ 1,991$ 2,011$ 2,031$ 2,051$ 2,072$ 2,093$ Percent of Total Sales 8.5% 7.8% 7.4% 7.0% 6.6% 6.2% 5.8% 5.5%Growth -1.1% 1.0%CAGR (in $) -0.1% 1.0% 1.0% 1.0% 1.0% 1.0%CAGR (in Sales Volume) -1.0% 0.0% 0.0% 0.0% 0.0% 0.0%CAGR (in Price) 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%



Sales 23,385$ 25,185$ 26,935$ 28,836$ 30,879$ 33,075$ 35,437$ 37,977$ Growth 7.7% 6.9% 7.1% 7.1% 7.1% 7.2%CAGR 7.3% 7.1%


Snack Food SegmentSales 12,506$ 13,621$ 14,504$ 15,534$ 16,637$ 17,818$ 19,083$ 20,438$ Percent of Total Sales 53.5% 54.1% 53.8% 53.9% 53.9% 53.9% 53.8% 53.8%Growth 8.9% 6.5%CAGR (in $) 7.7% 7.1% 7.1% 7.1% 7.1% 7.1%CAGR (in Sales Volume) 5.4% 5.0% 5.0% 5.0% 5.0% 5.0%CAGR (in Price) 2.2% 2.0% 2.0% 2.0% 2.0% 2.0%

Worldwide Beverage SegmentSales 8,886$ 9,592$ 10,440$ 11,291$ 12,211$ 13,206$ 14,283$ 15,447$ Percent of Total Sales 38.0% 38.1% 38.8% 39.2% 39.5% 39.9% 40.3% 40.7%Growth 7.9% 8.8%CAGR (in $) 8.4% 8.2% 8.2% 8.2% 8.2% 8.2%CAGR (in Sales Volume) 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%CAGR (in Price) 3.2% 3.0% 3.0% 3.0% 3.0% 3.0%

Subsidiary CompanySales 1,993$ 1,972$ 1,991$ 2,011$ 2,031$ 2,051$ 2,072$ 2,093$ Percent of Total Sales 8.5% 7.8% 7.4% 7.0% 6.6% 6.2% 5.8% 5.5%Growth -1.1% 1.0%CAGR (in $) -0.1% 1.0% 1.0% 1.0% 1.0% 1.0%CAGR (in Sales Volume) -1.0% 0.0% 0.0% 0.0% 0.0% 0.0%CAGR (in Price) 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%


Been to a video store lately?

• The 80s video store• Video chains• Delivery• Streaming


Netflix

• Sales $ growth 46%, 21%, 13%, 22%, 29% respectively• Sales $ CAGR 26%

0

500000

1000000

1500000

2000000

2500000

2005 2006 2007 2008 2009 2010

Revenues (000s)


Netflix

• Sales Vol growth 51%, 18% 26%, 31%, 63% respectively• Sales Vol CAGR 37%

0

5000

10000

15000

20000

25000

2005 2006 2007 2008 2009 2010

Total subscribers at end of period (000s)


$8

$9

$10

$11

$12

$13

$14

2005 2006 2007 2008 2009 2010

Monthly Plan

Netflix

• Sales Price growth…• Sales Price CAGR…


Netflix

Sales $ growth 46% 21% 13% 22%Sales Volume growth 51% 18% 26% 31%Sales Price growth



• How has Netflix revenue model changed?

1 Out Limited 4.99$ 1 Out Unlimited 8.99$ 2 Out Unlimited 13.99$ 3 Out Unlimited 16.99$ 4 Out Unlimited 23.99$

etc.

1 Out Limited 4.99$ 1 Out Unlimited 9.99$ 2 Out Unlimited 14.99$ 3 Out Unlimited 19.99$ 4 Out Unlimited 27.99$

etc.



• The 80s video store• Video chains• Delivery• Streaming• Better streaming• NPD, not R&D• The extra dollar• Customer Satisfaction Proposition

(not Customer “Value” Proposition, IMHO)• Forecasting• Graduation


Operating Expenses

Percent of Sales:• Cost of Goods Sold• Selling, General & Administrative Expenses• Other Operating Expenses

• Watch for “one time” expenditures. These may be legitimately unique or be an indication of manipulation.


Projecting Operating Expenses


Cost of Goods SoldYear -2 Year -1 Year 0

Sales 23,385$ 25,185$ 26,935$ COGS 9,635$ 10,099$ 10,747$ COGS as % of Sales


Cost of Goods SoldYear -2 Year -1 Year 0

Sales 23,385$ 25,185$ 26,935$ COGS 9,635$ 10,099$ 10,747$ COGS as % of Sales 41.2% 40.1% 39.9%


Cost of Goods SoldYear -2 Year -1 Year 0 FC 1 FC 2 FC 3 FC 4 FC 5

Sales 23,385$ 25,185$ 26,935$ 28,836$ 30,879$ 33,075$ 35,437$ 37,977$ COGS 9,635$ 10,099$ 10,747$ COGS as % of Sales 41.2% 40.1% 39.9% 39.7% 39.5% 39.3% 39.1% 39.0% flattening at 39.0% for FC6+



Sales 23,385$ 25,185$ 26,935$ 28,836$ 30,879$ 33,075$ 35,437$ 37,977$ COGS 9,635$ 10,099$ 10,747$ 11,448$ 12,197$ 12,999$ 13,856$ 14,811$ COGS as % of Sales 41.2% 40.1% 39.9% 39.7% 39.5% 39.3% 39.1% 39.0% flattening at 39.0% for FC6+




Selling, General & AdministrativeYear -2 Year -1 Year 0 FC 1 FC 2 FC 3 FC 4 FC 5

Sales 23,385$ 25,185$ 26,935$ 28,836$ 30,879$ 33,075$ 35,437$ 37,977$ SG&A 10,266$ 10,981$ 11,609$ SG&A as % of Sales 43.9% 43.6% 43.1% 43.1% 43.1% 43.1% 43.1% 43.1% flat at 43.1% for all FC years





Sales 23,385$ 25,185$ 26,935$ 28,836$ 30,879$ 33,075$ 35,437$ 37,977$ SG&A 10,266$ 10,981$ 11,609$ 12,428$ 13,309$ 14,256$ 15,274$ 16,368$ SG&A as % of Sales 43.9% 43.6% 43.1% 43.1% 43.1% 43.1% 43.1% 43.1% flat at 43.1% for all FC years





Sales 23,385$ 25,185$ 26,935$ 28,836$ 30,879$ 33,075$ 35,437$ 37,977$ SG&A 10,266$ 10,981$ 11,609$ 12,428$ 13,309$ 14,256$ 15,274$ 16,368$ SG&A as % of Sales 43.9% 43.6% 43.1% 43.1% 43.1% 43.1% 43.1% 43.1% flat at 43.1% for all FC years

Other Reasonable Growth AssumptionsOther Revenue 5.5% ROIOther Expenses 0.2% of SalesInterest Income 4.2% average earned on Average Cash & Short Term InvestmentsInterest Expense 6.0% on Average Short Term Borrowing, Current Maturities of LT Debt, and LT DebtIncome Tax Expense 32.0% Effective Tax RatePreferred Dividends Constant Preferred Dividend $ FigureCommon Dividends Dividend Payout Rate of 38.0% of Net Income, plus any necessary adjustment to the Balance Sheet


Assets

• Cash & Marketable Securities • Accounts Receivable• Inventories• Other Current Assets• Investments in Unconsolidated Affiliates• Property, Plant & Equipment• Other Assets

• What assets vary as a function of Total Assets?


Assets

• Cash & Marketable Securities (Days Sales)• Accounts Receivable (Days Sales)• Inventories (COGS x Inventory Turnover)• Other Current Assets (% of Total Assets?)• Investments in Unconsolidated Affiliates (TBD)• Property, Plant & Equipment (explicit model)• Other Assets (TBD)

• Few assets vary as a % of Total Assets


Projecting Assets


CashYear 0 FC 1 FC 2 FC 3 FC 4 FC 5

Days Sales in Cash 10 days 10 days 10 days 10 days 10 days 10 days flat 10 days Sales in CashSales $26,935 $28,836 $30,879 $33,075 $35,437 $37,977Avg Sales per DayYear-end Cash Balance



Days Sales in Cash 10 days 10 days 10 days 10 days 10 days 10 days flat 10 days Sales in CashSales $26,935 $28,836 $30,879 $33,075 $35,437 $37,977Avg Sales per Day $73.8 $79.0 $84.6 $90.6 $97.1 $104.0Year-end Cash Balance



Days Sales in Cash 10 days 10 days 10 days 10 days 10 days 10 days flat 10 days Sales in CashSales $26,935 $28,836 $30,879 $33,075 $35,437 $37,977Avg Sales per Day $73.8 $79.0 $84.6 $90.6 $97.1 $104.0Year-end Cash Balance $738 $790 $846 $906 $971 $1,040


Accounts ReceivableYear 0 FC 1 FC 2 FC 3 FC 4 FC 5

Accounts Receivable Collection 29 days 29 days 29 days 29 days 29 days 29 days flat 29 days A/R CollectionSales $26,935 $28,836 $30,879 $33,075 $35,437 $37,977Average Accounts ReceivableEnd of Year Accounts Receivable $2,142Beg. Of Year Accounts Receivable



Accounts Receivable Collection 29 days 29 days 29 days 29 days 29 days 29 days flat 29 days A/R CollectionSales $26,935 $28,836 $30,879 $33,075 $35,437 $37,977Average Accounts Receivable $2,291 $2,453 $2,628 $2,816 $3,017 Sales * Collection Period / 365End of Year Accounts Receivable $2,142Beg. Of Year Accounts Receivable $2,142



Accounts Receivable Collection 29 days 29 days 29 days 29 days 29 days 29 days flat 29 days A/R CollectionSales $26,935 $28,836 $30,879 $33,075 $35,437 $37,977Average Accounts Receivable $2,291 $2,453 $2,628 $2,816 $3,017 Sales * Collection Period / 365End of Year Accounts Receivable $2,142 $2,440 $2,467 $2,789 $2,842 $3,193Beg. Of Year Accounts Receivable $2,142 $2,440 $2,467 $2,789 $2,842




InventoriesYear 0 FC 1 FC 2 FC 3 FC 4 FC 5

Inventory Turnover 8.7 8.7 8.7 8.7 8.7 8.7 flat 8.7 Inventory Turnover rateCOGS $10,747 $11,448 $12,197 $12,999 $13,856 $14,811Average InventoriesEnd of Year Inventories $1,310Beg. Of Year Inventories





Inventory Turnover 8.7 8.7 8.7 8.7 8.7 8.7 flat 8.7 Inventory Turnover rateCOGS $10,747 $11,448 $12,197 $12,999 $13,856 $14,811Average Inventories $1,316 $1,402 $1,494 $1,593 $1,702End of Year Inventories $1,310Beg. Of Year Inventories $1,310





Inventory Turnover 8.7 8.7 8.7 8.7 8.7 8.7 flat 8.7 Inventory Turnover rateCOGS $10,747 $11,448 $12,197 $12,999 $13,856 $14,811Average Inventories $1,316 $1,402 $1,494 $1,593 $1,702End of Year Inventories $1,310 $1,322 $1,482 $1,506 $1,679 $1,725Beg. Of Year Inventories $1,310 $1,322 $1,482 $1,506 $1,679


Property, Plant & EquipmentYear 0 FC 1 FC 2 FC 3 FC 4 FC 5

Sales Growth 7.1% 7.1% 7.1% 7.1% 7.2%Capital Expenditures $1,324 grows at same rate as SalesEnding Balance at Cost $12,180Depreciation Expense per depreciation scheduleAccumulated Depreciation ($5,304)Ending Balance Net $6,876



Sales Growth 7.1% 7.1% 7.1% 7.1% 7.2%Capital Expenditures $1,324 $1,417 $1,518 $1,626 $1,742 $1,867 grows at same rate as SalesEnding Balance at Cost $12,180Depreciation Expense per depreciation scheduleAccumulated Depreciation ($5,304)Ending Balance Net $6,876



Sales Growth 7.1% 7.1% 7.1% 7.1% 7.2%Capital Expenditures $1,324 $1,417 $1,518 $1,626 $1,742 $1,867 grows at same rate as SalesEnding Balance at Cost $12,180 $13,597 $15,115 $16,741 $18,483 $20,350Depreciation Expense per depreciation scheduleAccumulated Depreciation ($5,304)Ending Balance Net $6,876



Sales Growth 7.1% 7.1% 7.1% 7.1% 7.2%Capital Expenditures $1,324 $1,417 $1,518 $1,626 $1,742 $1,867 grows at same rate as SalesEnding Balance at Cost $12,180 $13,597 $15,115 $16,741 $18,483 $20,350Depreciation Expense ($903) per depreciation scheduleAccumulated Depreciation ($5,304) ($6,207)Ending Balance Net $6,876



Sales Growth 7.1% 7.1% 7.1% 7.1% 7.2%Capital Expenditures $1,324 $1,417 $1,518 $1,626 $1,742 $1,867 grows at same rate as SalesEnding Balance at Cost $12,180 $13,597 $15,115 $16,741 $18,483 $20,350Depreciation Expense ($903) per depreciation scheduleAccumulated Depreciation ($5,304) ($6,207)Ending Balance Net $6,876 $7,390



Sales Growth 7.1% 7.1% 7.1% 7.1% 7.2%Capital Expenditures $1,324 $1,417 $1,518 $1,626 $1,742 $1,867 grows at same rate as SalesEnding Balance at Cost $12,180 $13,597 $15,115 $16,741 $18,483 $20,350Depreciation Expense ($903) ($967) ($1,036) ($1,110) ($1,190) per depreciation scheduleAccumulated Depreciation ($5,304) ($6,207)Ending Balance Net $6,876 $7,390



Sales Growth 7.1% 7.1% 7.1% 7.1% 7.2%Capital Expenditures $1,324 $1,417 $1,518 $1,626 $1,742 $1,867 grows at same rate as SalesEnding Balance at Cost $12,180 $13,597 $15,115 $16,741 $18,483 $20,350Depreciation Expense ($903) ($967) ($1,036) ($1,110) ($1,190) per depreciation scheduleAccumulated Depreciation ($5,304) ($6,207) ($7,174) ($8,210) ($9,320) ($10,510)Ending Balance Net $6,876 $7,390 $7,941 $8,531 $9,163 $9,840


Other Assets (such as trademarks, brands, goodwill and other intabngibles from acquisitions)Year 0 FC 1 FC 2 FC 3 FC 4 FC 5

Sales Growth 7.1% 7.1% 7.1% 7.1% 7.2%Other Assets (at Year End) $6,095 $6,525 $6,987 $7,485 $8,019 $8,594 grows at same rate as Sales

Other Reasonable Asset AssumptionsShort-term Investments 4.5% of Total AssetsMarketable Securities 4.5% of Total AssetsOther Current Assets 3.5% of Total AssetsInvestments 14.0% of Total Assets


Liabilities

• Accounts Payable (Based on Days Inventory)• Other Current Liabilities (Same % as SG&A?)• Short-term Borrowings (Trend?)• Long-term Debt (Trend?)• Current Maturities of LT Debt (Explicit Model)• Deferred Income Taxes (Same % as Sales?)• Other Non-current Liabilities (Same % as SG&A?)


Projecting Liabilities


Accounts PayableYear 0 FC 1 FC 2 FC 3 FC 4 FC 5

COGS $10,747 $11,448 $12,197 $12,999 $13,856 $14,811PLUS Ending Inventory $1,310 $1,322 $1,482 $1,506 $1,679 $1,725LESS Beginning InventoryInventory PurchasesPaybles Period 41 days 41 days 41 days 41 days 41 days flat at 41 daysAverage Accounts PayableBeg. Of Year Accounts PayableEnd of Year Accounts Payable $1,238



COGS $10,747 $11,448 $12,197 $12,999 $13,856 $14,811PLUS Ending Inventory $1,310 $1,322 $1,482 $1,506 $1,679 $1,725LESS Beginning Inventory ($1,310)Inventory PurchasesPaybles Period 41 days 41 days 41 days 41 days 41 days flat at 41 daysAverage Accounts PayableBeg. Of Year Accounts PayableEnd of Year Accounts Payable $1,238



COGS $10,747 $11,448 $12,197 $12,999 $13,856 $14,811PLUS Ending Inventory $1,310 $1,322 $1,482 $1,506 $1,679 $1,725LESS Beginning Inventory ($1,310) ($1,322) ($1,482) ($1,506) ($1,679)Inventory PurchasesPaybles Period 41 days 41 days 41 days 41 days 41 days flat at 41 daysAverage Accounts PayableBeg. Of Year Accounts PayableEnd of Year Accounts Payable $1,238



COGS $10,747 $11,448 $12,197 $12,999 $13,856 $14,811PLUS Ending Inventory $1,310 $1,322 $1,482 $1,506 $1,679 $1,725LESS Beginning Inventory ($1,310) ($1,322) ($1,482) ($1,506) ($1,679)Inventory Purchases $11,459Paybles Period 41 days 41 days 41 days 41 days 41 days flat at 41 daysAverage Accounts PayableBeg. Of Year Accounts PayableEnd of Year Accounts Payable $1,238



COGS $10,747 $11,448 $12,197 $12,999 $13,856 $14,811PLUS Ending Inventory $1,310 $1,322 $1,482 $1,506 $1,679 $1,725LESS Beginning Inventory ($1,310) ($1,322) ($1,482) ($1,506) ($1,679)Inventory Purchases $11,459 $12,358 $13,022 $14,029 $14,857Paybles Period 41 days 41 days 41 days 41 days 41 days flat at 41 daysAverage Accounts PayableBeg. Of Year Accounts PayableEnd of Year Accounts Payable $1,238



COGS $10,747 $11,448 $12,197 $12,999 $13,856 $14,811PLUS Ending Inventory $1,310 $1,322 $1,482 $1,506 $1,679 $1,725LESS Beginning Inventory ($1,310) ($1,322) ($1,482) ($1,506) ($1,679)Inventory Purchases $11,459 $12,358 $13,022 $14,029 $14,857Paybles Period 41 days 41 days 41 days 41 days 41 days flat at 41 daysAverage Accounts Payable purchases * period / 365Beg. Of Year Accounts PayableEnd of Year Accounts Payable $1,238



COGS $10,747 $11,448 $12,197 $12,999 $13,856 $14,811PLUS Ending Inventory $1,310 $1,322 $1,482 $1,506 $1,679 $1,725LESS Beginning Inventory ($1,310) ($1,322) ($1,482) ($1,506) ($1,679)Inventory Purchases $11,459 $12,358 $13,022 $14,029 $14,857Paybles Period 41 days 41 days 41 days 41 days 41 days flat at 41 daysAverage Accounts Payable $1,287 purchases * period / 365Beg. Of Year Accounts PayableEnd of Year Accounts Payable $1,238



COGS $10,747 $11,448 $12,197 $12,999 $13,856 $14,811PLUS Ending Inventory $1,310 $1,322 $1,482 $1,506 $1,679 $1,725LESS Beginning Inventory ($1,310) ($1,322) ($1,482) ($1,506) ($1,679)Inventory Purchases $11,459 $12,358 $13,022 $14,029 $14,857Paybles Period 41 days 41 days 41 days 41 days 41 days flat at 41 daysAverage Accounts Payable $1,287 purchases * period / 365Beg. Of Year Accounts Payable $1,238End of Year Accounts Payable $1,238



COGS $10,747 $11,448 $12,197 $12,999 $13,856 $14,811PLUS Ending Inventory $1,310 $1,322 $1,482 $1,506 $1,679 $1,725LESS Beginning Inventory ($1,310) ($1,322) ($1,482) ($1,506) ($1,679)Inventory Purchases $11,459 $12,358 $13,022 $14,029 $14,857Paybles Period 41 days 41 days 41 days 41 days 41 days flat at 41 daysAverage Accounts Payable $1,287 purchases * period / 365Beg. Of Year Accounts Payable $1,238End of Year Accounts Payable $1,238 $1,336



COGS $10,747 $11,448 $12,197 $12,999 $13,856 $14,811PLUS Ending Inventory $1,310 $1,322 $1,482 $1,506 $1,679 $1,725LESS Beginning Inventory ($1,310) ($1,322) ($1,482) ($1,506) ($1,679)Inventory Purchases $11,459 $12,358 $13,022 $14,029 $14,857Paybles Period 41 days 41 days 41 days 41 days 41 days flat at 41 daysAverage Accounts Payable $1,287 $1,388 $1,463 $1,576 $1,669 purchases * period / 365Beg. Of Year Accounts Payable $1,238 $1,336 $1,440 $1,486 $1,666End of Year Accounts Payable $1,238 $1,336 $1,440 $1,486 $1,666 $1,672


Other Current LiabilitiesYear 0 FC 1 FC 2 FC 3 FC 4 FC 5

Sales Growth 7.1% 7.1% 7.1% 7.1% 7.2%Other Current Liabilities (at EOY) $3,406 $3,646 $3,905 $4,182 $4,481 $4,802 grows at same rate as Sales

Deferred Income TaxesYear 0 FC 1 FC 2 FC 3 FC 4 FC 5

Sales Growth 7.1% 7.1% 7.1% 7.1% 7.2%Deferred Income Taxes (at EOY) $1,496 $1,602 $1,715 $1,837 $1,968 $2,109 grows at same rate as Sales

Other Noncurrent LiabilitiesYear 0 FC 1 FC 2 FC 3 FC 4 FC 5

Sales Growth 7.1% 7.1% 7.1% 7.1% 7.2%Other Noncurrent Liabilities (at EOY) $3,876 $4,149 $4,444 $4,760 $5,100 $5,465 grows at same rate as Sales

Other Reasonable Asset AssumptionsShort-term Borrowings 0.5% of Total Assets


Equity Items

Consider these is these in the context of assets & liabilities which have been forecasted

• Preferred Stock (rarely changes)• Minority Interest (rarely changes)• Common Stock (TBD)• Capital In Excess of Par Value (TBD)• Accumulated Other Comprehensive Loss (TBD)• Other Equity Adjustments (TBD)• Treasury Stock (TBD)


Financial Need & Capital Structure

• The Balance Sheet will probably not balance without adjustment

• Is there a source of or a need for additional capital?• EFN (Extra Funds Needed) can be modeled explicitly from

financial statements (based on the imbalance), but this will require iterative adjustments to expenses such as interest, which will influence balances such as cash, which…



• EFN can also be estimated in this way:

• Where• A* = assets that increase proportionally with sales• L* = liabilities that increase proportionally with sales• g = growth rate in sales• EBIT = operating income• T = tax rate• d = dividend payout ratio• I0 = interest expense (ignoring any additional financing)

• i = interest rate on additional funds borrowed



• Where is EFN going to be applied?– Change in cash or marketable securities– Change in long-term investment securities – Change in long-term, interest bearing debt– Change in dividends or treasury stock repurchases

• Now the Pro Forma Balance Sheet can be constructed


Other IS Items

• Interest Expense• Interest Income• Income Taxes• Net Income

• Now the Pro Forma Income Statement can be constructed


Dividends & Change in Retained Earnings• Dividend Policy• Change in RE = NI – Dividends

• Now the Pro Forma Statement of Retained Earnings can be constructed


Statement of Cash Flows

• Cash Flows from Operations• Cash Flows from Investing• Cash Flows from Financing Activities


Building the Statement of Cash Flows



From here, we can compute Free Cash Flows


Assumptions

• What assumptions are we making about PepsiCo?• How can we test each?• What segments for sales are you using?• How are you attributing growth to

volume & price?• What is PepsiCo’s relationship between

sales & assets?• What about costs of raw materials?


PepsicoPepsiCo Americas Foods

FLNA Lorraine Chow Hansen, President-Global SnacksQFNA Becerra Jose Luis Prado, President-Quaker Foods North AmericaLAF Olivier M. Weber, President-South America & Central America Foods

PepsiCo Americas BeveragesPAB Bradley Jakeman, President-Global Beverage Group

Luis Montoya, President-Latin America BeveragesPepsiCo Europe

Europe Eugene Willemsen, President-South East Europe RegionPepsiCo Asia, Middle East and Africa

AMEA Sanjeev Kumar Chadha, Chief Executive Officer-Asia, Middle East & AfricaRamon Laguarta, President-Developing & Emerging Markets

All PEP company executivessource: http://quotes.wsj.com/PEP/company-people

Indra K. Nooyi, Chairman & Chief Executive OfficerZein Abdalla, PresidentHugh F. Johnston, Chief Financial Officer & Executive Vice PresidentMehmood Khan, Chief Scientific Offi cer & Executive VPRobert L. Dixon, Chief Information Officer & Senior Vice PresidentKelly Mahon Tullier, Senior Vice President & Deputy General


PepsicoNet Revenue Contribution FLNA PBNA PI QFNA LAF PAB UKEU MEAA Europe AMEA Divested Business Total

2003 9,091 7,733 8,678 1,467 2 26,9692004 9,560 8,313 9,862 1,526 0 29,2612005 10,322 9,146 11,376 1,718 0 32,5622006 10,844 1,769 3,972 10,362 4,750 3,440 0 35,1372007 11,586 1,860 4,872 11,090 5,896 4,170 39,4742008 12,507 1,902 5,895 10,937 6,891 5,119 43,2512009 12,421 2,687 5,703 10,116 7,028 5,277 43,2322010 12,573 2,656 6,315 20,401 9,602 6,291 57,8382011 13,322 2,656 7,156 22,418 13,560 7,392 66,5042012 13,574 2,636 7,780 21,408 13,441 6,653 65,4922013

CAGR 5% 7% 10%

Operating Profit FLNA PBNA PI QFNA LAF PAB UKEU MEAA Europe AMEACorporate UnallocatedRestructuring & Impairment Charges Total2003 2,242 1,690 1,061 470 4,7812004 2,389 1,911 1,323 475 -689 -150 5,2592005 2,529 2,037 1,607 537 -788 0 5,9842006 2,615 554 655 2,315 700 401 -738 0 6,5022007 2,845 568 714 2,487 855 466 -753 7,1822008 2,959 582 897 2,026 910 592 -1,007 6,9592009 3,105 781 904 2,172 948 700 -566 8,0442010 3,376 741 1,004 2,776 1,054 708 -1,327 8,3322011 3,621 797 1,078 3,273 1,210 887 -1,233 9,6332012 3,646 695 1,059 2,937 1,330 747 -1,302 9,1122013

CAGR 6% 4% 7%


PepsicoHOW IS THIS TABLE BUILT?The table below shows the dollar values and the total percent change, then attributes dollar difference to four causes: Change in volume, in pricing, in FX translation and from acquisitions and divestitures.The percent allocated to each cause is a proportion of the total % change based on the dollar value attributed to each. Consider FLNA & LAF as examples:

FLNA as stated $ equivalent LAF as statedNet Revenue, 2012 13574 252 increase 1.89% increase 7780 624 increase 8.72% increaseNet Revenue, 2011 13322 7156% Impact of:Volume -1% -126 -1/2 of $ due to volume 4% 277 4/9 of $ due to volumeEffect net pricing 3% 378 3/2 of $ due to price 10% 693 10/9 of $ due to priceForeign exchange translation 0% 0 0/2 of $ due to FX -7% -485 -7/9 of $ due to FXAcquisitions and divestitures 0% 0 0/2 of $ due to Acq. 2% 139 2/9 of $ due to Acq.Reported Growth 2% 252 sum of $ total increase 9% 624 sum of $ total increase

From the footnotes, the % change in volume appears to be adjusted for the effect of acquisitions & divestitures, but otherwise is an increase in actual servingsUse the % change in volume as given in these tables from the 10-k.


Pepsicofrom table from notes

Volume effect on net revenue FLNA QFNA LAF PAB UKEU MEAA Europe AMEA Total Total 2006-07 3.0% 2.0% 5.0% -1.0% 4.0% 12.0% 3.0%2007-08 0.0% -1.5% 0.0% -4.5% 4.0% 14.0% 1.0% 3%2008-09 1.0% 0.0% -2.0% -7.0% -3.0% 7.0% -1.0% 0%2009-10 0.0% 0.0% 3.0% n/a n/a 12.0% n/a 7%2010-11 2.0% -5.0% 3.5% n/a n/a 10.0% n/a 6%2011-12 -1.0% -1.0% 4.0% -3.0% 0.0% 8.0% 0.0% 3%Geometric Avg 0.5% -1.5% 2.1% #VALUE! #VALUE! 9.2% 4.0%

"In 2012, total servings increased 3% compared to 2011. Excluding the impact of the 53rd week, total servings also increased 3% compared to 2011. In 2011, total servings increased 6% compared to 2010. Excluding the impact of the 53rd week, total servings increased 5% compared to 2010. 2012 and 2011 servings growth reflects an adjustment to the base year for divestitures that occurred in 2012 and 2011, as applicable."

"In 2011, total servings increased 6% compared to 2010. Excluding the impact of the 53rd week, total servings increased 5% compared to 2010. In 2010, total servings increased 7% compared to 2009. 2011 servings growth reflects an adjustment to the base year (2010) for divestitures that occurred in 2011, as applicable. "

"In 2010, total servings increased 7% compared to 2009, as servings for snacks increased 2% while servings for beverages increased 9%. In 2009, total servings increased slightly compared to 2008, as servings for snacks increased 1% while servings for beverages

"In 2009, total servings increased slightly compared to 2008, as servings for snacks increased 1% while servings for beverages decreased 1%. In 2008, total servings increased 3% compared to 2007, as servings for both snacks and beverages worldwide grew 3%."


The Right Tax Rate to Use

• The choice really is between the effective and the marginal tax rate. In doing projections, it is far safer to use the marginal tax rate since the effective tax rate is really a reflection of the difference between the accounting and the tax books.– What about GE and their zero tax liability?

• By using the marginal tax rate, we tend to understate the after-tax operating income in the earlier years, but the after-tax tax operating income is more accurate in later years

• If you choose to use the effective tax rate, adjust the tax rate towards the marginal tax rate over time.


Expected FCF

• Forecast, then Recast– Start by predicting what is likely to be published on the financial

statements.– After that, recast the figures to better reflect the economic realities for

operating leases, R&D (if applicable) and sustainability of operating cash flows.

• Compute FCFs using more than one formula to ensure you have found all the issues in your figures.


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