CFA Level I · CFA Level I Exam · Financial Statement Forecasting in Equity Valuation
An analyst forecasts a retailer's revenue using a top-down approach. Which of the following sequences best describes that approach?
The top-down approach starts with economic growth, moves to industry sales, and then applies an expected market share to the industry total to get company revenue. Summing store-level sales is bottom-up, and extrapolating historical growth is a trend method.
- AForecast store-level sales and sum them across all locations
- BExtrapolate the company's past revenue growth rate
- CForecast economic growth, then industry sales, then the company's market shareCorrect
Explanation
A top-down approach starts with macro variables such as GDP growth, moves to industry sales, and then applies a market share estimate to reach company revenue. Summing store-level sales is a bottom-up method, and extrapolating past growth is a simple trend method rather than a top-down one.
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