Forecast and Cash Flow-Based Valuation

Forecast and Cash Flow Based valuation Student's Name Institutional Affiliation Course Name & Code Instructor's Name Date Risks and Incentives Entailing Biases in Forecasting Analysts, managers, and accountants are exposed to unique risks and incentives that shape their biases when making forecasts. Managers are often overly optimistic because of performance-related bonuses and a desire to present positive company prospects. That may result in an overestimation of revenues and an underestimation of expenses. Accountants are governed by relatively conservative accounting principles such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS) and the risk of litigation against misreporting (Wahlen, Baginski, & Bradshaw, 2023). The primary motivation then becomes compliance and avoiding litigation, which leads to a conservative bias. It understates the assets and revenues and overstates liabilities and expenses, hence a cautious presentation of the financial state. Since analysts need credibility with investors and clients, they try to be as unbiased and realistic as possible in their estimates. Their main risk is a loss of reputation and client confidence if their forecasts repeatedly turn out wrong. Though trying to produce unbiased forecasts, market conditions or pressure from one's employer may push them toward the prevailing sentiments, which may either be conservative or optimistic, biased based on the context. Factors Affecting Sales Volume and Selling Price Growth The forecast for the sales volume growth and price growth has to consider firm-specific, industry-specific, and economy-wide factors. A firm's strategic factor that could influence sales volume is an i...