Question
1. Analysts are encouraged to develop forecasts that are realistic, objective, and unbiased. Some firms managers tend to be optimistic. Some accounting principles tend to
1. Analysts are encouraged to develop forecasts that are realistic, objective, and unbiased. Some firms managers tend to be optimistic. Some accounting principles tend to be conservative. Describe the different risks and incentives that managers, accountants, and analysts face. Explain how these different risks and incentives lead managers, accountants, and analysts to different biases when predicting uncertain outcomes.
2. In this question, we will explore factors that influence growth for a company both growth in sales volume and growth in price. Describe one firm specific strategic factor, one industry specific factor, and one economywide factor that could impact ones forecast of sales volume. Describe one firm specific strategic factor, one industry specific factor, and one economywide factor that could impact growth in prices as well.
3. Suppose you are valuing a healthy, growing, profitable firm and you project that the firm will generate negative free cash flows for equity shareholders in each of the next five years. Can you use a free cash flow-based valuation approach when cash flows are negative? If so, explain how a free cash flows approach can produce positive valuations of firms when they are expected to generate negative free cash flows over the next five years.
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