You have to make forecasts of financial performance Forecasts for Valuing Bega Cheese 

Making Performance Forecasts for Valuing Bega Cheese 

You have to make forecasts of financial performance stated in terms of abnormal earnings and  book values, or free cash flows, over the life of the firm- Bega Cheese. The forecasting task itself  is divided into two subcomponents: (1) detailed forecasts over a finite number of years, known as  the ‘forecast horizon’, and (2) a forecast of ‘terminal value’, which represents a summary of  performance beyond the forecast horizon. Second, you have to estimate the cost of capital to  discount our forecasts. 

Specifically, you need to forecast Bega Cheese’s condensed income statement, beginning balance  sheet and free cash flows for a period of 10 years starting in fiscal year 2014 (year beginning July  2013). You will use these same forecasting assumptions and financial forecasts, which are  repeated here in Tables 8.1 and 8.2, as a starting point to value Bega Cheese as of July 2013.

As discussed in Chapter 7, under the different approaches to valuation, the key forecasts required to convert the financial forecasts  into estimates of value are: abnormal earnings: net income less shareholders’ equity at the beginning of the year times shareholders’  required return, termed the cost of equity v abnormal ROE: abnormal ROE, or the difference between ROE and cost of equity, adjusted  for growth in book value, or free cash flows to equity: net income less any increase in operating working capital and net long-term  assets plus any increase in net debt. In order to generate the forecasts of abnormal earnings and abnormal ROE, you need to establish  an estimated cost of equity for the firm. For the purposes of this discussion you will take Bega Cheese’s cost of equity as given at  8.96%; the detailed calculation of this estimate was discussed later in the chapter. Table 8.3 shows Bega Cheese’s performance  forecasts for these three financial statement variables for the 10-year period 2014 to 2023. As discussed earlier, to derive cash flows  in 2023, You need to make assumptions about sales growth rate and balance sheet ratios in 2024. The cash flow forecasts shown in Table 8.2 assume thatthe sales growth from 2024 is 3% (explained in Chapter 6) and beginning balance sheet ratios in 2024 remain the  same as in 2023. You need to discuss the sensitivity of these assumptions and the terminal value assumption later in the chapter.  Bega Cheese’s projected abnormal ROE increases slightly over the forecast horizon, from 1.2% in 2014 to 1.5% in 2023. Abnormal operating ROA also shows a similar trend. In contrast, both abnormal earnings and abnormal NOPAT trend strongly upwards through  the forecast period, reflecting the assumption that Bega Cheese will continue to improve its profitability through better utilization of  its existing capacity and costmanagement.

Requirements: 

You need to forecast Bega Cheese’s condensed income statement, beginning with the balance  sheet and free cash flows for a period of 10 years starting in fiscal year 2014 (year beginning July  2013). You will use forecasting assumptions and financial forecasts, which are repeated here in  Tables 8.1 and 8.2, as a starting point to value Bega Cheese as of July 2013. 

Specifically you are required to: 

1. calculate/recalculate

• Requirement 1 Calculation sheet  
• Requirement 2 Calculation sheet  
• Requirement 3 Calculation sheet, 
• Requirement 5 Calculation sheet) according to the following assumptions provided in the questions. 

2. answer the following 5 (five) questions in a report 

• How will the forecasts in Table 8.2 change if Bega Cheese to maintain a sales growth rate of 6%  per year from 2014 to 2023 (and all the other assumptions are kept unchanged)?
• Recalculate the forecasts in Table 8.2 assuming that the NOPAT profit margin is held steady for the first five years of the forecast and then declines by 0.1 percentage points per year thereafter  (keeping all the other assumptions unchanged).
• Recalculate the forecasts in Table 8.3 assuming that the ratio of net operating working capital to salesis 10% and the ratio of net long-term assets to sales is 30% for all the years from fiscal 2014  to fiscal 2023. Keep all the other assumptions unchanged.
• Calculate Bega Cheese’s cash payouts to its shareholders in the years 2014–23 that are implicitly  assumed in the projections in Table 8.2. Show detail calculations in a table 
• How will the abnormal earnings calculations in Table 8.3 change if the cost of equity assumption is changed to 10%?