CFA Level I · CFA Level I Exam · Financial Statement Forecasting in Equity Valuation
An analyst forecasts next-year sales of 800 million with an operating margin of 10%. A sensitivity test lowers the margin to 8% and raises sales by 5% from the base. Ignoring interest and taxes, operating profit under the test is closest to:
Operating profit under the test is about 67 million. Sales rise 5% to 840 million, and at an 8% margin operating profit is 67.2 million. Using the unchanged 800 million of sales gives 64 million, and 80 million is the base case.
- A64 million
- B67 millionCorrect
- C80 million
Explanation
Base operating profit is 800×0.10 = 80. Tested sales are 800×1.05 = 840. Operating profit = 840×0.08 = 67.2, about 67 million. The 64 option forgets the sales increase; 80 is the base case.
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