Prospective Analysis: Forecasting

Question 1.

GlaxoSmithKline is one of the largest pharmaceutical firms in the world, and over an extended period of time in the recent past, it consistently earned higher ROEs than the pharmaceutical industry as a whole. As a pharmaceutical analyst, what factors would you consider to be important in making projections of future ROEs for GlaxoSmithKline? In particular, what factors would lead you to expect GlaxoSmithKline to continue to be a superior performer in its industry, and what factors would lead you to expect GlaxoSmithKline's future performance to revert to that of the industry as a whole?

Question 2.

An analyst claims: "It is not worth my time to develop detailed forecasts of sales growth, profit margins, et cetera, to make earnings projections. I can be almost as accurate, at virtually no cost, using the random walk model to forecast earnings." What is the random walk model? Do you agree or disagree with the analyst's forecast strategy? Why or why not?

Question 3.

Which of the following types of businesses do you expect to show a high of degree of seasonality in quarterly earnings? Explain why.

Supermarket.

Pharmaceutical Company.

Software Company.

Auto Manufacturer.

Clothing Retailer.

Question 4.

What factors are likely to drive a firm's outlays for new capital (such as plant, property, and equipment) and for working capital (such as receivables and inventories)? What ratios would you use to help generate forecasts of these outlays?

Question 5.

How would the following events (reported this year) affect your forecasts of a firm's future net profit?

Question 6.(a.)

What would be the year 6 forecast for earnings per share for each of the two earnings forecasting models?

Question 6.(b.)

Actual earnings per share for Telefonica in 6 were €0.91. Given this information, what would be the year 7 forecast for earnings per share for each model? Why do the two models generate quite different forecasts? Which do you think would better describe earnings per share patterns? Why?

Question 7.

An investment banker, states: "It is not worth my while to worry about detailed, long-term forecasts. Instead, I use the following approach when forecasting cash flows beyond three years. I assume that sales grow at the rate of inflation, capital expenditures are equal to depreciation, and that net profit margins and working capital to sales ratios stay constant." What pattern of return on equity is implied by these assumptions? Is this reasonable?

Problem Predicting Tesco's 2009/2010 earnings