Business Valuation of Polo Ralph Lauren Corporation - Mark Moore ...

average of this ratio, with the exception of 2001 because of its unusual expense, will beapplied to determine upcoming operating costs. Operating income for 2005 is determinedusing the average of previous values of operating income, which have been steadybesides in 2001. This value however is likely to rise due to increased operatingefficiency. With a tax expense of 40% and negligible extraneous expenses, this value istaken out of operating income to determine net income for the future.To begin balance sheet forecasting, future asset figures will be figured with theapplication of the average of the past asset turnover ratios. Accounts receivable turnoverhas been decreasing over the past five years, but is probably going to level off around 6.5times. Increases in inventory turnover hint at slow inventory growth over the future.Forecasted costs will be used with the inventory turnover ratio to determine upcominginventories. Accounts payable has been increasing at a rate of about 3% over the past fiveyears, and the trend should continue. The decreasing debt to equity ratio should notdecrease too much further beyond .5. With half as much debt as equity, future liabilitiesand equity values can be predicted to remain between 0.5 and 0.7. An average currentasset growth of 10.6% will be applied to current assets over the next year and shoulddecline to 7-8%. Total current liabilities for the upcoming years will be determined byapplying the average current ratio of the past two years to the current assets. Long termdebt has been decreasing and could continue to decrease over the next few years. Thenotes payable account will be difficult to forecast, but will remain low due to Polo’scurrent rate of debt payoff.The cash flow statement for Polo Ralph Lauren features several inconsistent andhighly volatile items. These unpredictable numbers make forecasting for the cash flowstatement difficult. Cash from operating has been consistent with net income values as apercentage. The average of 55% is applied to the net income of the forecasted years todetermine cash from operations for the future. Cash from investing is determined byapplying the differences between non-current asset values throughout the years. The netchange in cash is determined by the balance sheet cash value forecasts. The cash flowfrom financing will make up for any differences in cash flows.Previous data of the past five years has helped to predict the direction that PoloRalph Lauren is going, but this information has not determined where the company is26