Equity Valuation and Analysis - Mark Moore

Inventory = COGS/6.71
This method provides a link between the income statement and the balance
sheet. Dividing our COGS, which were previously found on our income statement by
our inventory turnover rate, we were able to forecast inventory for the next 10 years.
The industry average was 6.27, but this was not the best number to choose because of
the heavy fluctuation that occurred from year to year. Therefore, it was more logical to
choose Dow’s inventory turnover because it was less volatile than the industries.
The final Current Asset that we forecasted was accounts receivable. This is yet
another technique used to link the Income Statement with the balance sheet.
9.07 = Net Sales/Accounts Receivable
Adjusted
Accounts Receivable = Net Sales/9.07
By dividing your forecasted Net Sales by 9.07, we were able to forecast out our
accounts receivable for the next ten years.
The stand-alone non-current asset that we forecasted was Goodwill. Our
common sized balance sheet gave us 7.5%, which we decreased to 7% after removing
the 2002 and 2003 outliers.
Following the forecasts of assets, we computed retained earnings and
stockholders equity. Since Dow is an equity-based firm, it was important to estimate
equity before liabilities were forecasted. Retained earnings were the first step we took
in this process. To forecast them, we took the previous years retained earnings and
added the current year net income minus dividends. To forecast total shareholders
equity, we subtracted the retained earnings from the previous years retained earnings.
Then we added that number to the previous shareholders equity to forecast the future
shareholders equity for the next ten years.
Dow Chemical Analysis Page 88