Discuss the various approaches to revenue and earnings estimation and present your opinions on when to apply each method.

Discussion questions about capital budgeting | Business & Finance homework help

There are three main approaches for estimating revenue and earnings: top-down, bottom-up, and similar companies.

Top-down analysis takes an overall look at the market size or potential of a given industry and uses that information to estimate the company’s future earnings capacity. It is most useful in markets with little competition, where it can accurately predict the market size.

To determine the contribution of each business unit to overall revenues or profits, bottom-up analysis involves analyzing every component within a company. This method works best for multi-divisional businesses, but it can be used when studying competitors. It allows investors to evaluate individual performance metrics like gross margins or sales growth rates.

Comparable companies refers to a method in which publicly traded firms of similar size are compared with one another. This allows for the estimation of estimated value for specific metrics like expected earnings per share, price/earnings ratios or expected earnings per shares. Comparable companies works well when there is enough competition in the same market so meaningful comparisons are possible.

Each method is appropriate for the particular context in which it is being used. Top down is generally more suitable for longer term projections while bottom up suits shorter term valuations better. Comparable companies provides useful data points for estimating value metrics like P/E ratio but should not be relied upon exclusively without considering other factors such as competitive dynamics or macroeconomic conditions that could affect a particular stock’s performance over time.

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