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CFA Level I · CFA Level I Exam · Financial Statement Forecasting in Equity Valuation

An analyst forecasting a company's sales uses bottom-up estimates for each of three firms in an industry and finds the combined forecast market share exceeds 100%. The most appropriate response is to:

The analyst should reconcile the bottom-up forecasts with a top-down industry view and revise the assumptions. Market shares summing above 100% are impossible, so combining both approaches identifies unrealistic inputs. Simply keeping the figures or adjusting one firm without reason would leave the inconsistency.

  1. Areduce only the largest firm's forecast, ignoring the others
  2. Bretain the forecasts because bottom-up estimates are more reliable
  3. Creconcile the bottom-up forecasts with a top-down industry view and revise the assumptionsCorrect

Explanation

Combined shares above 100% are internally inconsistent. Cross-checking bottom-up forecasts against a top-down industry estimate exposes unrealistic assumptions, which should then be revised across firms. Arbitrarily cutting one firm's forecast or keeping the figures is not justified.

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