1) Many students of financial statement analysis, like new analysts, produce overly optimistic forecasts for a firm. Some managers are also optimistic in their forecasts. What would you see as evidence of such over-optimism in their forecasts, and what possible explanations are there for such behavior?

2. Ali Baba, an analyst with Smart Beta Inc., claims: ‘It is not worth my time to develop detailed forecasts of sales growth, profit margins, etcetera, to make earnings projections. I can be almost as accurate, at virtually no cost, using the random walk model to forecast earnings’. What is the random walk model? Do you agree or disagree with Ali Baba’s forecast strategy? Why or why not?

3. Imagine you are a financial analyst preparing investment advice for your clients.
   1. Consider the various sections of an annual financial report. Which section(s) do you think would be of most value to you when it is publicly released?
   2. What other sources of data would be useful to you if you are reporting on firms in the following industries:
      • building and constructions
      • extractive industries (i.e. mining)
      • hospitals and medical services
      • software as a service
      • airlines.

4. Which of the following types of businesses do you expect to show very little degree of seasonality in sub-period earnings? Explain why earnings might be constant throughout the year for those selected.

• A car mechanic
• A juice manufacturer
• A university
• A property valuer
• A dentist

5. Which of the following types of businesses do you expect to show a high degree of seasonality in quarterly earnings? Explain why.

• A telecommunications company
• A consulting company
• A software as a service company
• A car manufacturer
• A grocery retailer

6. An analyst forecasts that next year’s net operating profit after tax will be the same as this year’s net operating profit after tax. Under what conditions is this a good forecast?

7. CSL is one of the largest biotechnology firms in Australasia, and over an extended period of time it consistently earned higher ROEs than the biotech industry as a whole. As a biotechnology analyst, what factors would you consider to be important in making projections of future ROEs for CSL? In particular, what factors would lead you to expect CSL to continue to be a superior performer in its industry, and what factors would lead you to expect CSL’s future performance to revert to that of the industry as a whole?