CFA Level I · CFA Level I Exam · Financial Statement Forecasting in Equity Valuation
An analyst forecasting a company's gross margin expects the company to gain pricing power through a differentiated product while input costs stay flat. Holding other factors constant, the forecast gross margin is most likely to:
The forecast gross margin would most likely increase. Pricing power raises revenue per unit while input costs stay flat, so cost of goods sold falls as a percentage of sales and gross profit as a share of revenue rises.
- Adecline
- Bbe unchanged
- CincreaseCorrect
Explanation
Higher selling prices with flat unit input costs raise revenue per unit while cost per unit is unchanged, so gross profit per unit and gross margin rise.
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