Random walk model to forecast earnings and free cash flow

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Reference no: EM132064622

1. Critically evaluate the following statement made by a quantitative buy-side analyst: “It is not worth the time to develop detailed fundamentals-based forecasts of sales growth and profit margins to make earnings projections, or cash flow components to make projections of free cash flow. One can be almost as accurate, at virtually no cost, using the random walk model to forecast earnings and free cash flow.”

2. To forecast earnings and cash flows beyond three years, a sell-side analyst assumes that sales grow at the rate of inflation, capital expenditures are equal to depreciation, and that leverage, net profit margins, and working capital to sales ratios stay constant. Explain what pattern of return on equity is implied by these assumptions and whether this is reasonable.

3. “A company cannot grow faster than its sustainable growth rate.” Is this statement True or false? Explain your answer.

Reference no: EM132064622

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