Strategic Financial Analysis Accounting and Reporting

Question: Discuss about the Strategic Financial Analysis for Accounting and Reporting. Answer: Introduction: The forecasting of data has some limitation that need to be kept in mind while performing forecasting. The forecasting is done on assumptions that can be change in future and the actual result may not match with the forecasted result. The forecasting is calculated on the basis of historical data and there is no guarantee that the factors and conditions in the past will continue into the future. Therefore, it can be said that the results are based on assumptions (Elliott and Elliott, 2008). Assumptions can be dangerous as the business environment keep on changing that will affect the future results. The forecasting of financial statements shows the actual value of a company in future. The operations of the company are influenced by different factors that cannot be included as the variable. In worst scenario, the management of the company becomes slave to the historical data and they start worrying about whether the business will grow or not (Hillier, 2010). However, forecasting allows the company to plan ahead as well as evaluating future challenges and opportunities. The investors also analyses the future development of a company and analyses the forested results. Therefore, the forecasting result influences the investment decisions of the investors. If the forecasted result is positive then the decisions of the investors will be influenced in positive way and if the forecasted result is negative then the decisions of the investors will be influenced in negative way (Holton, 2012). The financial performance of Cochlear Limited has been forecasted in order to determine and evaluate the value of the company. Valuation summary using various methodologies under varying scenarios Beginning book value Value of forecast period Value beyond forecast horizon Total value equity Value per share Scenario 1 - Persistent abnormal performance Abnormal earnings 302,825 27,212 59,526 389,563 2.03 Abnormal ROE 302,825 27,212 59,526 389,563 2.03 Free cash flows to equity n/a 180,380 220,610 400,990 2.09 Scenario 2 - Persistent abnormal performance Abnormal earnings 302,825 38,639 55,032 396,496 2.07 Abnormal ROE 302,825 38,639 55,032 396,496 2.07 Free cash flows to equity n/a 199,643 196,081 395,724 2.07 Scenario 3 - Persistent abnormal performance Abnormal earnings 302,825 27,212 59,526 389,563 2.03 Abnormal ROE 302,825 27,212 59,526 389,563 2.03 Free cash flows to equity n/a 220,610 192,807 413,417 2.16 Scenario 4 - Persistent abnormal performance Abnormal earnings 302,825 27,212 -4 330,033 1.72 Abnormal ROE 302,825 27,212 -4 330,033 1.72 Free cash flows to equity n/a 180,380 220,610 400,990 2.09 Weighted average number of shares (Annual report Note) 191,615 The share value analysis helps to estimate the value and actual performance of company during a period of time. The discount dividend valuation method is the most commonly used to method to estimate the price of share and easiest to understand. The stock of the company can be valued without taking into account the market conditions (Kieso, Weygandt and Warfield, 2007). The market value of the company can be determined with the help of this model. The investors also analyses the share price of the company in order to determine and evaluate the value of the company. The discount dividend valuation method calculates the share price of the company that helps the investors to take investment decision. The price multiple uses the share price of the firm in conjunction with specific per share method in order to evaluate the financial situation of the company (Moles, 2011). Therefore, it combines the performance of the company with the stock price of the company. The valuation techniques hel p to determine and evaluate the value of the company. The investors and shareholders analyses the financial performance of the company during a specific period of time. The share valuation technique has been used to determine and evaluate the market value of Cochlear Limited (Spiceland, Sepe and Nelson, 2011). PV of forecast period (abn earnings) 27,212 PV of forecast period (abn ROE) 27,212 PV of forecast period (free cash flows to equity) 180,380 PV of forecast period (abn NOPAT) 38,639 PV of forecast period (abn ROA) 38,639 PV of forecast period (free cash flows to capital) 192,807 Terminal values (abn earnings) 59,526 Terminal values (abn ROE) 59,526 Terminal values (free cash flows to equity) 220,610 Terminal values (abn NOPAT) 59,526 Terminal values (abn ROA) 59,526 Terminal values (free cash flows to capital) 312,809 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2026 (Terminal value) Capital structure % net debt 25.0% 25.5% 26.0% 26.5% 27.0% 27.5% 28.0% 28.5% 29.0% 29.5% 30.0% % equity 75.0% 74.5% 74.0% 73.5% 73.0% 72.5% 72.0% 71.5% 71.0% 70.5% 70.0% Cost of capital Debt % 4.90% 4.90% 4.90% 4.90% 4.90% 4.90% 4.90% 4.90% 4.90% 4.90% 4.90% Equity % 8.48% 8.48% 8.48% 8.48% 8.48% 8.48% 8.48% 8.48% 8.48% 8.48% 8.48% WACC % 7.59% 7.57% 7.55% 7.53% 7.51% 7.50% 7.48% 7.46% 7.44% 7.42% 7.41% References Elliott, B. and Elliott, J. (2008).Financial accounting and reporting. Harlow: Financial Times Prentice Hall. Hillier, D. (2010).Corporate finance. London: McGraw-Hill Higher Education. Holton, R. (2012).Global finance. Abingdon, Oxon: Routledge. Kieso, D., Weygandt, J. and Warfield, T. (2007).Intermediate accounting. Hoboken, NJ: Wiley. Moles, P. (2011).Corporate finance. Hoboken, N.J.: Wiley. Spiceland, J., Sepe, J. and Nelson, M. (2011).Intermediate accounting. New York: McGraw-Hill Irwin. Stittle, J. and Wearing, B. (2008).Financial accounting. Los Angeles: SAGE Publications. Wild, J. (2005).Financial accounting. Boston: McGraw-Hill/Irwin.