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Background and Purpose

The CEO of a U.S. electronics firm is assessing the financial forecasts and the financing plan prepared by the chief financial officer.

Given the cyclicality of the industry and the volatility of the firm's performance, the CEO is unsure as to the usefulness of forecasts based on straight line extrapolation of rapid sales growth and stable relationships of profits and assets to sales.


Science Technology Company (STC) should not discuss the current 5-year financing plan prepared by Harry Finson, the chief financial officer, at the forthcoming board meeting. The industry that STC is in has short product life cycle, rapid technology obsolescence and fast growth with increasing competition. In fact, STC's strategy to survive the competition is to maintain leadership in ATE segment and to further compete in the large scale integrated (VLSI) circuits segment by chasing market share and spreading high R&D cost over large sales. However, the large sales growth seems to be more difficult to obtain with the newly added competition. Based on historical trend, level of competition, and other related industry figures;

Given the level of uncertainty in the market and the emerging markets of Japan and Korea it will not be viable to discuss the future projection beyond 2 years. With the dynamic nature of the market and the product type constant up gradation and R&D requirements, a growth rate projection based on 30% annual increase is unrealistic. A more reasonable growth rate of 10-11% is more appropriate in order to make future projections.

The scenario where the STC projections are made at a growth rate of 30% is more of an optimistic and unrealistic scenario without accounting for the market changes and the anticipated growth in the Asian Semiconductor and technical goods market.

Scenarios Optimistic Pessimistic Realistic
Growth rate 30% 5-7% 10-12%
Probability 20% 30% 50%

With a 30% growth projection, the production cycle of semiconductors and the pricing cycle has not been aptly analyzed. With a short life cycle of a particular product and subsequent price reduction an constant growth projection over the next 5 years is biased.…...

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