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

When a company's historical revenue shows a one-time jump caused by the acquisition of a competitor, the analyst building a forecast model would most appropriately:

The analyst should adjust the historical data or model the acquisition's effect separately, then project organic growth from the cleaned base. Extrapolating a one-time jump would overstate future growth, and ignoring company history entirely would throw away relevant information about the firm.

  1. AExtrapolate the jump as the normal growth rate in all future years
  2. BAdjust the historical data or separately model the acquisition effect before projecting organic growthCorrect
  3. CIgnore the historical data and use the industry average growth rate

Explanation

Non-recurring items such as acquisitions distort the trend, so the analyst should separate or adjust for them and forecast organic growth. Extrapolating the jump overstates growth, and discarding company history discards useful information.

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