Skip to content

CFA Level I · CFA Level I Exam · Introduction to Financial Statement Modeling

An analyst forecasts capital expenditure for a company with growing sales. Which approach is most likely to produce a forecast consistent with the company's planned growth?

Linking capex to the change in sales using a historical capital intensity ratio is most consistent with planned growth. Growth needs net asset additions, so capex should scale with expansion. Setting capex equal to depreciation only maintains the asset base, and a fixed amount ignores growth.

  1. ASet capex equal to depreciation expense each year
  2. BLink capex to the change in sales using a historical capital intensity ratioCorrect
  3. CKeep capex fixed at last year's level

Explanation

Growth requires net additions to fixed assets, so capex must exceed depreciation and scale with expansion. Linking capex to sales changes via capital intensity captures this. Capex equal to depreciation only maintains the asset base, and fixed capex ignores growth.

Did you get it right without looking?

One question tells you little. A timed set on Introduction to Financial Statement Modeling shows your real accuracy, how long you take and where you lose marks.

Practise Introduction to Financial Statement ModelingFree diagnostic mock

More Introduction to Financial Statement Modeling questions