CFA Level I · CFA Level I Exam · Equity Analyst Research Reports
A report's price target rests on a forecast of 25% annual revenue growth for ten years, which is far above the industry's historical range, with no supporting explanation. A reviewer would most likely conclude that the report:
The reviewer would most likely conclude the report lacks a reasonable basis, because its key growth assumption is far above industry history and is unexplained. Higher growth inflates value rather than being conservative, and a longer horizon adds uncertainty rather than reducing it.
- Alacks a reasonable basis for its recommendation because a key assumption is unsupportedCorrect
- Bis sound because a higher growth forecast always makes a valuation more conservative
- Cis reliable because the forecast horizon of ten years reduces estimation uncertainty
Explanation
Recommendations need a reasonable and adequate basis. An aggressive, unexplained growth input drives the valuation and undermines it. Higher growth raises value rather than making it conservative, and longer horizons increase, not reduce, uncertainty.
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