Prospective Analysis and Application

Financial Statement Analysis (Capstone)


Assignment: Prospective Analysis and Application (30 %)

Based on the same company chosen for the group and first individual assignment, produce an individual professional report on the prospective analysis of the company. Forecast the future financial performance of your company for the next five years and beyond. Use four valuation models, i.e. Dividend Discount Model, Residual Income Model, Residual Operating Income Model and Free Cash Flow Model, to produce an estimate of the firm’s share value, and compare to its current stock price. Perform sensitivity analysis on key forecasting assumptions using only Residual Operating Income Model and discuss the results. Based on sensitivity analysis and as a potential management consultant to your chosen firm, provide a discussion as to the possible opportunities for improvement, and potential challenges for the firm. Provide specific and reasonable remedies for these concerns. The report should cover:


Forecasting: (allocated 10 marks)

Prepare your forecasts in an excel spreadsheet following a 10-step forecasting template. The forecasting table should include your specific forecasts for the next five years and should be included as an appendix in the report.
Explain the reasons for your initial forecast assumptions, i.e. assumptions for sales growth, ATO, PM, net dividend payout ratio, cost of debt and cost of equity.

Valuation: (allocated 4 marks)

Provide the calculation and results of four valuation models in a table and include it as an appendix in the report.
Compare and discuss the estimates obtained from the four models. Compare the estimates with the actual share price to see whether the firm is currently overvalued or undervalued.

Sensitivity Analysis: (allocated 6 marks)

Adjust your initial forecast assumptions to reflect your optimistic and pessimistic outcomes for sales growth, ATO, PM, net dividend payout ratio, cost of debt and cost of equity and recalculate the estimated share value from the residual operating income model. Provide the sensitivity analysis results in a table.

Provide explanations of how the optimistic and pessimistic outcomes for forecasting assumptions are chosen.
Identify and discuss the key assumptions that the valuation is most sensitive to.

Management Consulting Advice: (allocated 8 marks)

Based on sensitivity analysis and the key factors that have significant impact on valuation, discuss potential opportunities and challenges for the firm to maintain or improve current profitability. Provide creative advice on what business strategies and measures specific to your firm that can be adopted to improve value.

Overall Report Quality: The report should be readily comprehensible, condensed and within the word limit. Information should be collected from various reliable sources to inform analysis and references are properly cited. Tables and graphs should be used to effectively present information. (allocated 2 marks)


Length5000 words (exclusive of references and appendices). +/- 10% is acceptable. Appendices are limited to a maximum of 10 pages. Please use a font size of 11, 2.5 cm page margins and a line spacing of 1.5.



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