Financial Analysis, Planning & Forecasting T h e o r y a n d A p p l i c a t i o n
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1 Financial Analysis, Planning & Forecasting T h e o r y a n d A p p l i c a t i o n Second Edition
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3 Financial Analysis, Planning & Forecasting T h e o r y a n d A p p l i c a t i o n Alice C Lee State Street Corp., USA John C Lee Center for PBBEF Research, USA Cheng F Lee Rutgers University, USA Second Edition World Scientific N E W J E R S E Y L O N D O N S I N G A P O R E B E I J I N G S H A N G H A I H O N G K O N G TA I P E I C H E N N A I
4 Published by World Scientific Publishing Co. Pte. Ltd. 5 Toh Tuck Link, Singapore USA office: 27 Warren Street, Suite , Hackensack, NJ UK office: 57 Shelton Street, Covent Garden, London WC2H 9HE British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. FINANCIAL ANALYSIS, PLANNING AND FORECASTING (2nd Edition) Theory and Application Copyright 2009 by World Scientific Publishing Co. Pte. Ltd. All rights reserved. This book, or parts thereof, may not be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording or any information storage and retrieval system now known or to be invented, without written permission from the Publisher. For photocopying of material in this volume, please pay a copying fee through the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA. In this case permission to photocopy is not required from the publisher. ISBN ISBN Typeset by Stallion Press enquiries@stallionpress.com Printed in Singapore.
5 Preface Organization and Suggestions We draw upon our years of teaching and research experience on the subject of financial analysis, planning and forecasting for this textbook. Overall, our goal is an introductionary level book that reviews, discusses, and integrates both theoretical and practical corporate analysis and planning. Financial analysis, planning and forecasting, are classified into five parts: (1) Information and Methodology for Financial Analysis; (2) Alternative Finance Theories and Cost of Capital; (3) Capital Budgeting and Leasing Decisions; (4) Corporate Policies and Their Interrelationships; (5) Financial Planning and Forecasting. We focus on three principles to frame our discussion of the material: (1) to integrate theory with practice; (2) to strike a balance between the overview and detailed understanding; and (3) to demonstrate how basic quantitative training required by management schools can be used to improve the usefulness of accounting and financial information in management decisions. Furthermore, the theory used and discussed in this book can be grouped into the following classical theoretical areas of corporate finance: (1) Pre- M&M Theory, (2) M&M Theory, (3) CAPM, and (4) Option Pricing Theory (OPT). The interrelationships among these theories are carefully analyzed. Meaningful real-world examples of using these theories are jointly discussed, step by step, with relevant data and methodology. Finally, alternative planning and forecasting models are used to show how the interdisciplinary approach can be used to make meaningful financial-management decisions. Prerequisites to an understanding of this book include one term of accounting; one term of economics; one term of quantitative methods (or statistics); one term of financial management; and/or one term of computer v
6 vi Financial Analysis, Planning, and Forecasting programming. To assist the student in learning and integrating new concepts, we provide approximately 40% review of the prerequisite material and 60% percent new information related to financial management. To further the learning process and application of the material, the book contains both problem sets and project approach assignments. Overall, there are 491 problem sets, which are given at the end each of the 25 chapters. These questions are used to reinforce the microview of understanding financial management. In addition, five projects are suggested at the end of each part of the text. These projects make for a useful term assignment that extends the topic material into a more macroview of understanding financial analysis, planning, and forecasting. Based on our personal teaching experiences at various universities, we find that this book can be used in a second undergraduate Financial Management course and a second MBA Financial Management course, as well as a financial analysis planning and forecasting course. In addition, this book can be used in the Investment Analysis and Portfolio Management course with some supplemental material. In this second edition, we have extensively updated and expanded the topics of financial analysis, planning and forecasting. The new chapters included in this new edition are as follows: Chapter 7 Chapter 8 Chapter 9 Chapter 10 Chapter 18 Chapter 19 Chapter 20 Chapter 24 Risk Estimation and Diversification Risk and Return Trade-Off Analysis Options and Option Strategies Option Pricing Theory and Firm Valuation Short-Term Financial Analysis and Planning Credit Management Cash, Marketable Securities, and Inventory Management Time-Series: Analysis, Model, and Forecasting
7 Acknowledgments The first second editions of this book have been worked on and critically reviewed by numerous individuals, including colleagues and previous students. We especially benefited from the insightful corrections, discussions, and suggestions of Joe E. Finnerty, Odet Palmon, Jack C. Francis, and Russel H. Fogler. We are also indebted to the following individuals: Joseph D. Vinso, John Thatcher, Severin C. Carlson, William C. Hunter, Russel P. Boisjoly, Robert J. Moreland, Paul G. Fellow, Randy P. Beatty, Joan C. Junkus, Douglas Schaller, Perry A. Milanesi, Paul Newbold, Bob Cummings, Tom J. Frecka, Andrew H. Chen, James A. Gentry, Charles M. Linke, J. Kenton Zumwalt, Timothy J. Nantell, Annie H. Lin, Quentin C. Chu, Gerard M. Nussbaum Raj Aggrawal, James S. Ang, Ren-Raw Chen, Sheng-Syan Chen, Thomas C. Chian, Chin-Chen Chien, Charles Corrado, Mao-Wei Hung, Ji-Chai Lin, Hun Y. Park, John Wald, K.C. John Wei, Chunchi Wu, Chau-Chen Yanb, Gili Yen, and Gillian Yeo. For the first edition, we are indebted to the Finance Editor at Addison-Wesley, Bill Hamilton, who kept the project moving, and to the Addison-Wesley staff. For the second edition, we appreciate the extensive help from the Ms. Sandhya of World Scientific Publishing, our research assistants David Chen, Wei-Kang Shih and Shin-Ying Mai, and our secretary Ms. Miranda Mei-Lan Luo. Finally, we would like to thank the financial support from the Wintek Corporation and the Polaris Financial Group that allowed us to write the second edition of this book. There are undoubtedly some errors in the finished product, both typographical and conceptual. I would like to invite readers to send suggestions, comments, criticisms, and corrections to the author Professor Cheng F. Lee vii
8 viii Financial Analysis, Planning, and Forecasting at the Department of Finance and Economics, Rutgers University at Janice H. Levin Building Room 141, Rockafeller Road, Piscataway, NJ December 2008 Cheng F. Lee Alice C. Lee John C. Lee
9 Dedication We would like to dedicate this book to Our Family: Schwinne, Jennifer, Michael, and Michelle; and to authors cited in the pages that follow. ix
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11 Contents 1. Introduction Financial Management: Analysis and Planning Basic Definitions Objectives of Financial Management Planning Horizon Classification Objectives and Philosophy of the Book Structure of the Book Problem Set References for Chapter Part 1 Information and Methodology for Financial Analysis Accounting Information, Regression Analysis, and Financial Management Introduction Financial Statements: A Brief Review Balance Sheet Statement of Earnings (Income Statement) Statement of Equity Statement of Cash Flows Annual vs Quarterly Financial Data Critique of Accounting Information Criticism Method for Improvement Use of Alternative Information Statistical Adjustments xi
12 xii Financial Analysis, Planning, and Forecasting Application of Finance and Economic Theories Static-Ratio Analysis and Its Extension Static Determination of Financial Ratios Liquidity Ratios Leverage Ratios Activity Ratios Profitability Ratios Estimation of the Target of a Ratio Dynamic Analysis of Financial Ratios Single-Equation Dynamic Adjustment Process Simultaneous Determination of Financial Ratios Statistical Distribution of Financial Ratios Cost-Volume-Profit Analysis and Its Applications Deterministic Analysis Stochastic Analysis Accounting Income vs Economic Income Summary Problem Set Appendix 2.A. Simple Regression and Multiple Regression A.1. Introduction A.2. Simple Regression A.3. Variance of ˆb A.4. Multiple Regression Appendix 2.B. Instrumental Variables and Two-Stage Least Squares B.1. Errors-in-Variable Problem B.2. Instrumental Variables B.3. Two-Stage, Least-Square References for Appendix References for Chapter Discriminant Analysis and Factor Analysis: Theory and Method Introduction Important Concepts of Linear Algebra
13 Contents xiii 3.3. Two-Group Discriminant Analysis k-group Discriminant Analysis Factor Analysis and Principal-Component Analysis Summary Notes Problem Set Appendix 3.A. Relationship between Discriminant Analysis and Dummy Regression Analysis A.1. Derivation of the Discriminant Function Appendix 3.B. Principal-Component Analysis B.1. Introduction References for Chapter Application of Discriminant Analysis and Factor Analysis in Financial Management Introduction Credit Analysis Bankruptcy and Financial Distress Analysis Applications of Factor Analysis to Select Useful Financial Ratios Bond Rating Forecasting Bond Quality Ratings and the Change of Quality Ratings for the Electric Utility Industry Ohlson s and Shumway s Methods for Estimating Default Probability Summary Problem Set Appendix 4.A. Jackknife Method and its Application in MDA Analysis References for Appendix References for Chapter Determination and Applications of Nominal and Real Rates-of-Return in Financial Analysis Introduction Theoretical Justification of Paying Interest Rate-of-Return Measurements and Types of Averages. 137
14 xiv Financial Analysis, Planning, and Forecasting Discrete Rates-of-Return and Continuous Rates-of-Return Types of Averages Power Means Theories of the Term Structure and Their Application Interest Rate, Price-Level Changes, and Components of Risk Premium Imperfect-Foresight Case Perfect-Foresight Case Three Hypotheses about Inflation and the Value of the Firm: A Review The Debtor-Creditor Hypothesis The Tax-Effects Hypothesis Operating-Income Hypothesis The Relationship among the Three Hypotheses Summary and Concluding Remarks Problem Set Appendix 5.A. Compounding and Discounting Processes and Their Applications A.1. Single-Value Case A.1.1. Compound Future Sum (Terminal Value) A.1.2. Present Value A.2. Annuity Case A.2.1. Compound Future Sum of An Annuity A.2.2. Present Value of An Annuity 170 Appendix 5.B. Taylor Series Expansion and Its Applications to Rates-of-Return Determination References for Chapter Project I Analyses of Accounting, Market and Economic Data 179 Part 2 Alternative Financial Theories and Cost of Capital Valuation and Capital Structure: A Review and Integration 181
15 Contents xv 6.1. Introduction Components of Capital Structure Opportunity Cost, Required Rate-of-Return, and the Cost of Capital Bond Valuation Perpetuity Term Bonds Preferred Stock Common-Stock Valuation Valuation Inflation and Common Stock Valuation Growth Opportunity and Common-Stock Valuation Financial Leverage and Its Effect on EPS Measurement Effect Degree of Financial Leverage and Combined Effect Optimal Capital Structure Overall Discussion Arbitrage Process and the Proof of M&M Proposition I Possible Reasons for Optimal Capital Structure The Traditional Approach of Optimal Capital Structure Bankruptcy Costs Agency Costs Imperfect Markets Summary and Remarks Questions and Problems Appendix 6.A. Convertible-Security Valuation Theory Appendix 6.B. Derivation of DOL, DFL, and CML B.1. DOL B.2. DFL B.3. DCL Appendix 6.C. Derivation of Dividend Discount Model C.1. Summation of Infinite Geometric Series C.2. Dividend Discount Model References for Appendix References for Chapter
16 xvi Financial Analysis, Planning, and Forecasting 7. Risk Estimation and Diversification Introduction Risk Classification Business Risk Financial Risk Total Risk Portfolio Analysis and Application Expected Rate of Return on a Portfolio Variance and Standard Deviation of a Portfolio The Two-asset Case The N-asset Case The Efficient Portfolios Corporate Application of Diversification The Market Rate of Return and Market Risk Premium The Risk Premium Determination of Commercial Lending Rates The Dominance Principle and Performance Evaluation Summary Questions and Problems Appendix 7.A. Estimation of Market Risks Premium Appendix 7.B. The Normal Distribution Appendix 7.C. Derivation of Minimum-Variance Portfolio Appendix 7.D. Sharpe Performance Approach to Derive Optimal Weight References for Appendix References for Chapter Risk and Return Trade-Off Analysis Introduction Capital Market Line, Efficient Market Hypothesis and Capital Asset Pricing Model Lending, Borrowing, and the Market Portfolio The Capital Market Line The Efficient-Market Hypothesis Weak-Form Efficient-Market Hypothesis Semistrong-Form Efficient-Market Hypothesis Strong-Form Efficient-Market Hypothesis The Capital Asset Pricing Model
17 Contents xvii 8.3. The Market Model and Beta Estimation Empirical Evidence for the Risk Return Relationship Why Beta is Important in Financial Management Systematic Risk Determination Business Risk and Financial Risk Other Financial Variables Capital Labor Ratio Fixed Costs and Variable Costs Market-Based versus Accounting-Based Beta Forecasting Some Applications and Implications of the Capital Asset Pricing Model Applications Liquidity and Capital Asset Pricing Model Arbitrage Pricing Theory Intertemporal CAPM Summary Questions and Problems Appendix 8.A. Mathematical Derivation of the Capital Asset Pricing Model Appendix 8.B. Arbitrage Pricing Model References for Chapter Note Options and Option Strategies Introduction The Option Market and Related Definitions What is an Option? Types of Options and Their Characteristics Relationships Between the Option Price and the Underlying Asset Price Sample Problem Additional Definitions and Distinguishing Features Types of Underlying Asset Institutional Characteristics Put-Call Parity European Options
18 xviii Financial Analysis, Planning, and Forecasting Sample Problem American Options Sample Problem Future Options Market Application Risk-Return Characteristics of Options Long Call Short Call Long Put Short Put Long Straddle Sample Problem Short Straddle Sample Problem Long Vertical (Bull) Spread Sample Problem Short Vertical (Bear) Spread Calendar (Time) Spreads Examples of Alternative Option Strategies Protective Put Covered Call Collar Summary Questions and Problems References for Chapter Option Pricing Theory and Firm Valuation Introduction Basic Concepts of Options Option Price Information Factors Affecting Option Value Determining the Value of a Call Option before the Expiration Date Determining the Value of Options Expected Value Estimation The Black Scholes Option Pricing Model Taxation of Options American Options
19 Contents xix Option Pricing Theory and Capital Structure Proportion of Debt in Capital Structure Riskiness of Business Operations Option Pricing Approach to Determine the Optimal Capital Structure Warrants Summary Questions and Problems Appendix 10.A. Applications of the Binomial Distribution to Evaluate Call Options A.1. What is an Option? A.2. The Simple Binomial Option Pricing Model A.3. The Generalized Binomial Option Pricing Model References for Chapter Project II Application of Useful Finance Theories 415 Part 3 Capital Budgeting and Leasing Decisions Alternative Cost of Capital Analysis and Estimation Introduction Overview of Cost of Capital Average Earnings Yield Versus Current Earnings Yield Method Discounting Cash-Flow Method Weighted-Average Cost of Capital Theoretical Justification of the WACC The CAPM Method M&M s Cross-Sectional Method The Cost of Capital Regression Formulation and Empirical Results Chase Cost of Capital Summary and Concluding Remarks Problem Set
20 xx Financial Analysis, Planning, and Forecasting Appendix 11.A. Derivative of the Basic Equilibrium Market Price of Stock and Its Implications References for Appendix References for Chapter Capital Budgeting Under Certainty Introduction Cash-Flow Evaluation of Alternative Investment Projects Alternative Capital-Budgeting Methods Accounting Rate-of-Return Internal Rate-of-Return Payback Method Net Present Value Method Profitability Index Comparison of the NPV and IRR Method Theoretical Criteria Multiple Rates-of-Return Reinvestment Rate Problem Separability of Projects Practical Perspective Equivalent Annual NPV and Equivalent Annual Cost Mutually Exclusive Investment Projects with Different Lives Capital-Rationing Decision Basic Concepts of Linear Programming Capital Rationing Summary Problem Set Appendix 12.A. NPV and Break-Even Analysis Appendix 12.B. Managers View on Alternative Capital-Budgeting Methods Appendix 12.C. Derivation of Crossover Rate References for Appendix References for Chapter Capital Budgeting Under Uncertainty Introduction
21 Contents xxi Risk-Adjusted Discount-Rate Method Certainty Equivalent Method The Relationship of the Risk-Adjusted Discount-Rate Method to the Certainty-Equivalent Method Three Other Related Stochastic Approaches to Capital Budgeting The Statistical Distribution Method The Decision-Tree Method Simulation Analysis Comparison of the Three Alternative Stochastic Methods Inflationary Effects in the Capital-Budgeting Procedure Multiperiod Capital Budgeting Overall Discussion The CAPM and Multi-Period Capital-Budgeting Decision-Making Summary and Concluding Remarks Problem Set Appendix 13.A. Time State Preference and the Real option Approaches for Capital Budgeting Under Uncertainty References for Appendix References for Chapter Leasing: Practices and Theoretical Developments Introduction Types of Leasing Arrangements and Accounting Treatments Three Leasing Forms Direct Leasing Sale and Leaseback Leveraged Leasing Accounting for Leases Capital Lease Treatment Accounting for Operating Leases Accounting for Leases from the Lessor s Standpoint
22 xxii Financial Analysis, Planning, and Forecasting Cash-Flow Estimation and Valuation Methods The Modigliani and Miller Propositions and the Theoretical Considerations of Leasing Leases-Versus-Buy Decisions Under Uncertainty: The CAPM Approach Summary and Conclusions Problem Set Appendix 14.A. APV Method and Application to Leasing Decision A.1 Myers Adjusted-Present-Value Method A.2 Myers Adjusted-Present-Value Method to Leasing References for Appendix References for Chapter Project III Capital Budgeting and Leasing Decisions 597 Part 4 Corporate Policies and Their Interrelationships Mergers: Theory and Evidence Introduction Overview of Mergers Classification of Business Combinations Classification by Corporate Structure Classification by Economic Relationship Methods of Business Combination Merger Accounting and Tax Effects Tax Implications Accounting Treatment of Business Combinations Economic Theories and Evidence Economic Theories Market Power Financial Theories and Evidence Diversification and Debt Capacity Integration and Summary Problem Set Appendix 15.A. Effects of Divestiture on Firm Valuation References for Chapter
23 Contents xxiii 16. Dividend Policy and Empirical Evidence Introduction The Value of Dividend Policy to the Firm Methods of Determining the Relevance of Dividends The Discounted Cash-Flow Approach The Investment Opportunities Approach Stream-of-Dividends Approach Stream-of-Earnings Approach Issues Marring the Dividend Problem The Classical CAPM Brennan s CAPM with Taxes The Litzenberger and Ramaswamy CAPM with Taxes Empirical Evidence Gordon s Empirical Work and Its Extensions M&M Empirical Work CAPM Approach Behavioral Considerations of Dividend Policy Partial Adjustment and Information Content Models An Integration Model Summary and Conclusions Problem Set References for Chapter Interaction of Financing, Investment and Dividend Policies Introduction Investment and Dividend Interactions: The Internal-Versus-External Financing Decision Internal Financing External Financing Interactions Between Dividend and Financing Policies Cost of Equity Capital and Dividend Policy Default Risk and Dividend Policy
24 xxiv Financial Analysis, Planning, and Forecasting Interactions Between Financing and Investment Decisions Risk-Free Debt Case Risky Debt Case Implications of Financing and Investment Interactions for Capital Budgeting Equity-Residual Method After-Tax, Weighted-Average Cost of Capital Method Arditti and Levy Method Myers Adjusted-Present-Value Method Debt Capacity and Optimal Capital Structure Implications of Different Policies on the Beta Coefficient Determination Impact of Financing Policy on Beta Coefficient Determination Impact of Production Policy on Beta Coefficient Determination Impact of Dividend Policy on Beta Coefficient Determination Summary and Conclusion Problem Set Appendix 17.A. Stochastic Dominance and Its Applications to Capital-Structure Analysis with Default Risk A.1. Introduction A.2. Concepts and Theorems of Stochastic Dominance A.3. Stochastic-Dominance Approach to Investigating the Capital-Structure Problem with Default Risk A.4. Summary References for Appendix References for Chapter
25 Contents xxv Project IV Analyses of Investment, Financing and Dividend Policies 733 Part 5 Financial Planning and Forecasting Short-Term Financial Analysis and Planning Introduction The Components of Working Capital The Concept of Cash Flow Cash Flow versus Funds Flow Organizing for Short-Term Financial Planning Short-Term Financial Planning Principles The Cash Flow Cycle and Its Calculation Cash Flow Forecasting, Budgeting, and Planning The Cash Budget Demand-Driven, Capital-Driven, and Cost-Driven Cash Budgets Users of Cash Forecasts and Business Plans Planning Horizons and Time Intervals of Cash Budgets From Forecasting to Budgeting to Planning Summary Questions and Problems Appendix 18.A. Time-Series Components of Sales A.1 The Contribution of Each Component A.2 Interpretation References for Chapter Credit Management Introduction Trade Credit The Cost of Trade Credit The Seller s Perspective The Buyer s Perspective
26 xxvi Financial Analysis, Planning, and Forecasting Financial Ratios and Credit Analysis Financial Ratio Analysis Numerical Credit Scoring Benefits of Credit-Scoring Models Outside Sources of Credit Information Credit Decision and Collection Policies Collection Policy Factoring and Credit Insurance Summary Questions and Problems References for Chapter Cash, Marketable Securities, and Inventory Management Introduction The Baumol and Miller Orr Model Baumol s EOQ Model Miller Orr Model Cash Management Systems Float Cash Collection and Transference Systems Cash Transference Mechanism and Scheduling Credit Lines and Bank Relations Bank Relations Marketable Securities Management Investment Criteria for Surplus Cash Balances Types of Marketable Securities Hedging Considerations Inventory Management Inventory Loans Economic Order Quantity Summary Questions and Problems Appendix 20.A. Derivation of Eq. (20.1) References for Chapter Elementary Applications of Programming Techniques in Working-Capital Management 827
27 Contents xxvii Introduction Linear Programming Working-Capital Model and Short-Term Financial Planning Questions to be Answered Model Specification and Its Solution Which Constraints are Causing Bottlenecks? How Much More Profit is Being Lost Because of Constraints? How do the Constraints Affect the Solution? Duality and Shadow Prices Short-Term Financial Planning Goal Programming Introduction Application of GP to Working-Capital Management Summary and Remarks on Goal Programming Programming Approach to Cash Transfer and Concentration Transfer Mechanisms Cash-Transfer Scheduling: Contemporary Practice Managing About a Target Anticipation Weekend Timing and Dual Balances Limitations of the Popular Techniques Mathematical-Programming Formulation The Objective Function Constraints on Transfers Include: Average Balance, Flow Balance, Minimum Balance, and Maximum Transfer Formulation Summary Deposit Variation Relation of Model Formulation to Current Practice Implementation Tests Field Concentration Tests Lockbox Concentration
28 xxviii Financial Analysis, Planning, and Forecasting Summary and Concluding Remarks Problem Set Appendix 21.A. The Simplex Algorithm for Solving Eq. (21.8) 862 Appendix 21.B. Mathematical Formulation of Goal Programming References for Chapter Long-Range Financial Planning A Linear-Programming Modeling Approach Introduction Carleton s Model Brief Discussion of Data Inputs Objective-Function Development The Constraints Definitional Constraints Sources and Uses Definition Policy Constraints Analysis of Overall Results Summary and Conclusion Problem Set Appendix 22.A. Carleton s Linear-Programming Model: General Mills as a Case Study A.1 Problem Specification A.2 Solution Appendix 22.B. General Mills Actual Key Financial Data References for Chapter Simultaneous-Equation Models for Financial Planning Introduction Warren and Shelton Model Anheuser Busch Companies, Inc. As A Case Study Data Sources and Parameter Estimations Procedure for Calculating WS Model Francis and Rowell (FR) Model The FR Model Specification Sector One: Industry Sales Sector Two: Company Sales and Production
29 Contents xxix Sector Three: Fixed Capital-Stock Requirements Sector Four: Pricing Sector Five: Production Costs Sector Six: Income Sector Seven: New Financing Required Sector Eight: Risk Sector Nine: Cost of Financing Sector Ten: Common Stock Valuation A Brief Discussion of FR s Empirical Results Summary Problem Set Appendix 23.A. Procedure of Using Microsoft Excel to Run FINPLAN Program Appendix 23.B. Program of FINPLAN with an Example References for Chapter Time-Series: Analysis, Model, and Forecasting Introduction The Classical Time-Series Component Model The Trend Component The Seasonal Component The Cyclical Component and Business Cycles The Irregular Component Moving Average and Seasonally Adjusted Time Series Moving Average Seasonal Index and Seasonally Adjusted Time Series Linear and Log-Linear Time Trend Regressions Exponential Smoothing and Forecasting Simple Exponential Smoothing and Forecasting The Holt Winters Forecasting Model for Non-Seasonal Series Autoregressive Forecasting Model Summary
30 xxx Financial Analysis, Planning, and Forecasting Problem Set Appendix 24.A. The X-11 Model for Decomposing Time-Series Components Appendix 24.B. The Holt Winters Forecasting Model for Seasonal Series References for Chapter Econometric Approach to Financial Analysis, Planning, and Forecasting Introduction Simultaneous Nature of Financial Analysis, Planning, and Forecasting Basic Concepts of Simultaneous Econometric Models Interrelationship of Accounting Information Interrelationship of Financial Policies The Simultaneity and Dynamics of Corporate-Budgeting Decisions Definitions of Endogenous and Exogenous Variables Model Specification and Applications Applications of SUR Estimation Method in Financial Analysis and Planning The Role of Firm-Related Variables in Capital-Asset Pricing The Role of Capital Structure in Corporate-Financing Decisions Applications of Structural Econometric Models in Financial Analysis and Planning A Brief Review AT&T s Econometric Planning Model Programming vs Simultaneous vs Econometric Financial Models Financial Analysis and Business Policy Decisions Summary Problem Set Appendix 25.A. Johnson & Johnson as a Case Study A.1 Introduction
31 Contents xxxi 25.A.2 Study of the Company s Operations A.2.1 Consumer A.2.2 Pharmaceuticals A.2.3 Medical Devices and Diagnostics A.3 Analysis of the Company s Financial Performance A.4 Variables and Time Horizon A.5 Model and Empirical Results References for Appendix References for Chapter Project V Analyses of Financial Planning and Forecasting 1073 Author Index 1075 Subject Index 1083
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