CFA Level I · CFA Level I Exam · Financial Statement Forecasting in Equity Valuation
An analyst forecasts a manufacturer's capital expenditures for the next five years. The firm is expanding capacity to meet rising demand. Which approach to forecasting capex is most appropriate?
Capex for an expanding firm is best forecast by linking it to projected sales growth and required capacity. Capex equal to depreciation covers only maintenance, so it would understate growth spending, and basing it on past operating cash flow ignores the firm's actual investment needs.
- AHold capex equal to depreciation expense
- BLink capex to forecast sales growth and capacity needsCorrect
- CSet capex equal to last year's operating cash flow
Explanation
A firm expanding capacity needs capex above maintenance levels, so capex should be tied to expected sales growth and capacity requirements. Setting capex equal to depreciation only replaces existing assets and would understate growth investment. Tying capex to last year's operating cash flow has no link to the firm's needs.
Did you get it right without looking?
One question tells you little. A timed set on Financial Statement Forecasting in Equity Valuation shows your real accuracy, how long you take and where you lose marks.
More Financial Statement Forecasting in Equity Valuation questions
- When forecasting a company's gross margin, an analyst expects input prices to rise while the company has limited pricing power. The analyst …
- A firm has sales of 500, variable costs of 300 and fixed costs of 100, so operating income is 100. The analyst forecasts sales rising 8% wit…
- An analyst begins a forecast of a manufacturer's revenue by projecting global GDP growth, then estimating the industry's share of GDP, and f…
- A company has forecast 2025 sales of €800 million. Based on historical relationships, the analyst expects days sales outstanding of 45 days,…
- An analyst forecasts that a company with a high degree of operating leverage will see sales fall 10% next year. Compared with a similar comp…
- An analyst forecasts a company's revenue by first projecting growth in global economic output, then estimating the industry's share of that …