CFA Level I · CFA Level I Exam · Financial Statement Forecasting in Equity Valuation
An analyst forecasts a company's revenue by first projecting growth in global economic output, then estimating the industry's share of that output, and finally applying the company's expected market share. This approach is best described as:
The approach is a top-down forecast. It begins with broad economic output, narrows to industry size, and then applies the company's expected market share to reach company revenue. A bottom-up method would instead aggregate individual store, product, or segment forecasts, so that option is wrong.
- Aa bottom-up forecast.
- Ba top-down forecast.Correct
- Ca sensitivity analysis.
Explanation
A top-down forecast starts with macroeconomic or aggregate variables, moves to the industry, and then to the company through its market share. A bottom-up forecast would instead build from company-level or segment-level data such as units and prices. Sensitivity analysis examines how results change when inputs vary, not how the revenue forecast is built.
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