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CFA Level I · CFA Level I Exam · Industry and Competitive Analysis

An industry's sales have fallen for several years due to changing consumer preferences, and firms are cutting capacity and consolidating. An analyst valuing a company in this industry should most appropriately:

The analyst should use conservative growth assumptions and consider capacity reduction and possible exits. A declining industry faces shrinking demand and excess capacity. Extrapolating past peak growth or assuming high margins regardless of demand would overstate value.

  1. Aextrapolate the recent peak growth rate for several more years
  2. Bassume high margins from falling competition regardless of demand
  3. Cuse conservative growth assumptions and consider the effects of capacity reduction and possible exitsCorrect

Explanation

Decline is marked by falling demand and excess capacity, so forecasts should use conservative growth and reflect restructuring or exits. Extrapolating peak growth ignores the decline, and assuming high margins ignores weak demand.

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