CFA Level I · CFA Level I Exam · Financial Statement Forecasting in Equity Valuation
Which approach to revenue forecasting is most likely to capture the effect of a new competitor entering a company's market?
Forecasting industry sales and then adjusting the company's market share best captures a new competitor, because the analyst can explicitly lower expected share. Extrapolating past growth assumes historical conditions continue and so ignores the change in competition.
- AExtrapolating the company's five-year average revenue growth
- BApplying last year's growth rate to last year's revenue
- CForecasting industry sales and then adjusting the company's market shareCorrect
Explanation
A market share model lets the analyst explicitly lower expected share to reflect competitive entry. Growth-rate extrapolation relies on historical patterns that do not reflect the new competitive conditions.
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