- CFA Exams
- 2023 Level I
- Topic 5. Equity Valuation
- Learning Module 22. Industry and Company Analysis
- Subject 7. Long-Term Forecasting
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Subject 7. Long-Term Forecasting PDF Download
Factors influencing the choice of the explicit forecast horizon include:
- The projected holding period.
- An investor's average portfolio turnovers. The timeframe should ideally correspond with average turnover of the portfolio.
- Cyclicality of an industry. The forecast period should be long enough to allow the business to reach an expected mid-cycle level of sales and profitability.
- Company specific factors.
- Employer preferences.
Normalized earnings are earnings adjusted for cyclical ups and downs. Unusual or one-time influences are not included. Normalized earnings help show the true earnings from operations.
Long-term forecasting:
- Establish a revenue projection for the explicit forecast period.
- Estimate a terminal value. Don't mechanically apply a long-term growth rate to a terminal year free cash flow projection.
Anticipate inflection points driven by:
- Economic disruption.
- Regulation changes.
- Technological advances.
Building a Model
Please refer to the textbook example.
Learning Outcome Statements
k. explain considerations in the choice of an explicit forecast horizon;l. explain an analyst's choices in developing projections beyond the short-term forecast horizon;
m. demonstrate the development of a sales-based pro forma company model.
CFA® 2023 Level I Curriculum, Volume 3, Module 22
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I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
Barnes
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