CFA Level I · CFA Level I Exam · Financial Statement Forecasting in Equity Valuation
An analyst forecasts revenue growth and profit margins separately for each division of a conglomerate but does not check whether the sum of divisional sales implies an unrealistic market share. This is most likely an example of:
This most likely reflects failing to check that the forecasts are consistent with industry size, capacity and competition. Bottom-up divisional projections can sum to an implied market share that is unrealistic, so analysts should cross-check them against top-down industry estimates.
- Afailing to consider the consistency of forecasts with industry capacity and competitionCorrect
- Bappropriately using a top-down approach to sales
- Capplying sensitivity analysis to a single input
Explanation
Bottom-up forecasts should be checked against industry size and competitive structure. Ignoring an implied market share that is unrealistic is a consistency failure. It is neither a proper top-down approach nor sensitivity analysis.
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