Guidelines for forecasting historical financial statements for valuation purposes

In this teaching note I list some suggestions that might be useful to take into account when forecasting financial statements departing from historical data. The ideas presented in this note are the result of advising undergraduate and graduate students in the course Econ 195.96/295.96 (Crosslisted: PubPol 264.96): Cash Flow Valuation (CFV): A Basic Introduction to an Integrated Market-based Approach at Duke University during the Fall 2005 and my previous experience of teaching the subject at Politécnico Grancolombiano in Bogotá, and other universities in Colombia. The note is divided in four sections: In Section One, Analyzing the Historical Financial Statements, is related to the analysis and use of historical information from the financial statements. In Section Two I mention some tips related to the construction of forecasted financial statements. In Section Three I present a list of tips related to the proper way to valuate the cash flows. In Section Four a brief summary is presented. There are three appendixes that can be applied to cases of ongoing concerns and to cases of new firms or projects. The first appendix has a list of possible variables to be taken into account in the forecast, the second one is a summary on how to proceed to forecast nominal price increases and nominal interest rates and the third one illustrates the use of the implicit deflator of the Gross Domestic Product, GDP and the Produces Price Index for the same task.