wewilldrawonaprinciplewelaidoutinChapter1.More
detail,byitself,doesnotgeneratemoreprecisevaluesandin
manycases,canbecounterproductive.Breakingitemsdown
intodetailmakessense onlyif wehavetheinformationto
estimate the individual items with more precision.
Applyingthisprincipletofirmvaluation,thereisnoreasonto
begin with revenues if we haveno reason to believe that
operating margins will change in predictable ways in the
future.Thatispartofthereasonallofthevaluationsinthis
chaptersofarhavebegunwithoperatingincome.However,if
we believethat operating marginsare in flux and we can
makereasonableestimatesofhowtheywillchangeovertime
(towardatargetorindustryaverage),itdoesmakesenseto
forecastrevenuesfirstandthenestimateoperatingmarginson
ayear-by-yearbasis.Thesamerulecanbeappliedtononcash
workingcapitalorcapitalexpenditurestodeterminewhether
more detail will pay off.
ILLUSTRATION 6.5: Valuing a Young, High-Growth
Company: Sirius Satellite Radio
In Chapter 4, we forecasted operating income and
reinvestmentneedsforSiriusSatelliteRadio.Reviewingthe
assumptions we made:
The firm reported an operating loss of $787 million on
revenuesof$187millioninthemostrecent financialyear.
Since we assume that operating margins willchange over
time toward theindustryaverage of 19.14%,webegan by
forecastingrevenuesinfutureyears andusedourestimated
operating margins to arrive at our measures of operating
income. The following table summarizes our forecasts: