financial analysis of Oracle Corporation (ORCL)

financial analysis of Oracle Corporation (ORCL)

Question
Forecasting Free Cash Flow (see sections 19.2 and 19Forecasting Free Cash Flow (see
sections 19.2 and 19.3 for reference): In this section, you are
going to determine a baseline scenario (what your group feels is most likely to happen) to
forecast future cash flow to the firm, then estimate future cash flow to the firm. The company's
growth rates and ability to control its costs are important elements of future performance. You
need to explain the company's performance in the baseline scenario, as well as justify sales and
expenses growth rates. You can predict the growth rate by using the previous years' financial
statements. In coming up with a realistic baseline scenario, the notes to the 10-Ks will be useful.
They should also alert you to important things such as possibilities of litigation or new ventures.
•

Start off with the income statement. You will estimate unlevered net income for the next
5 years (2016-2021) according to estimates regarding: sales, cost of goods sold, operating
expenses, depreciation, and income tax (assume a tax rate of 38%). Interest expenses are
excluded.
o Estimate sales each year by using a sales growth rate,
i.e.Salest=Salest?1*(1+g). You can calculate a sales growth rate directly,

o
o

or assume one given the analysis you have done in part 1. Be sure to justify your
sales growth rate!
The easiest way to estimate expenses is as a percentage of sales. Check the
common size adjustments to your income statement from previous years to get an
idea regarding what percent of sales corresponds to each expense. Adjust
accordingly, i.e. do you expect expenses to increase relatively on an annual basis?
Depreciation will depend on capital expenditures and the schedule used to
depreciate fixed assets. This is extremely difficult for an analyst to estimate. You
can infer it as a percentage of sales as you did with expenses, but be sure to adjust
accordingly if you expect the firm to make large capital expenditures in the near
future.
You will compute the tax obligation directly from earnings before taxes implied
by your estimates using a tax rate of 38%.
Calculate net income for each year, and include the table in your report.

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 financial analysis of Oracle Corporation (ORCL)

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