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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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