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    Short-term Performance Forecast and Employee Stock Options

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    2. What is the benefit of a short-term performance forecast? How might a manager combine the benefits of both short-term and long-term performance forecasts to develop a more accurate value forecast?

    6. Identify the strengths and weaknesses of the Enterprise DCF, Economic Profit, and Multiples approaches to estimating continuing value.

    7. What should a company consider when estimating the value of employee stock options? Identify the main factors that impact the value of employee stock options.

    3. Why is the continuing value estimate a less reliable forecast than the near-term (explicit) forecast?

    13. List some economic fundamentals that could affect a company's forecast.

    11. How would inflation affect the determination of the WACC, assuming significant inflation?

    15. What is the danger of looking back in history and using a constant 4 percent inflation rate in forecasting future financial performance?

    22. How would the presence of substantial discontinuities (lumpiness) make forecasting of fixed capital needs more complex?

    23. Discuss the continuing value model and the assumptions it makes.

    31. Why do is business valuation as an "art" rather than a "science"?

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    Solution Preview

    See the attached file.

    2. Short term performance forecast helps the manager to make there short term strategy. It helps the company to estimate revenue by sizing the total market, forecasting prices and determining the market share. Short term performance forecast provides the company guidelines to resize its debt manage its operating expenses and at the same a target to generate appropriate revenue for the company. A short term forecast and a long term forecast has a great correlation.
    Long term forecast along with short term forecast if matched can provide a clear picture of the company. With the combination of long term and short term forecast managers can prepared more accurate forecast for there company based on there mission and vision. Here the short term forecast guides the management to plan its strategy to make this forecast in to actual. I f the company misses to convert any of the short term forecast for any of the one year it can manage it for the next year by increasing its targets.

    6. There are following strengths and weaknesses of enterprise DCF, economic value and multiple approaches to continuing value:
    • It considers the differences in the magnitude and the timing of cash flow.
    • It always adjusts for risk in its calculation.
    • It always requires a clear assumptions statements for valuation
    • It requires forecasting of cash flows for each period, its terminal value and for the discount rate by using data that is limited or unreliable.
    • Naïve base year extrapolation.
    • It is extremely sensitive to the accuracy of income, cash flows and the discount rates.
    • In this method terminal value may constitute a disproportionate share of the total value.

    7. The company should consider following things when estimating the value ...

    Solution Summary

    The solution examines short-term performance forecasts and employee stock options.