CFA Level I · CFA Level I Exam · Financial Statement Forecasting in Equity Valuation
Which feature most likely makes a forecast based on historical company relationships between sales and costs less reliable for a firm that has just completed a large acquisition?
Historical relationships become less reliable because past margins and cost ratios may no longer reflect the combined business. An acquisition changes product mix, scale and cost structure, so analysts should adjust the forecast, for example by using pro forma data, rather than extrapolating the old ratios.
- APast margins may no longer reflect the combined business.Correct
- BMacroeconomic variables cannot be used in forecasts.
- CMarket share is always constant after acquisitions.
Explanation
After a major acquisition the business mix, cost structure and scale change, so past ratios may not apply to the combined entity. Analysts should adjust or use pro forma data. The other statements are incorrect generalizations: macro variables remain usable and market share changes.
Did you get it right without looking?
One question tells you little. A timed set on Financial Statement Forecasting in Equity Valuation shows your real accuracy, how long you take and where you lose marks.
More Financial Statement Forecasting in Equity Valuation questions
- An analyst forecasts that a retailer will fund growth by issuing new debt each year. When projecting interest expense, which method is most …
- An analyst forecasts a company's revenue by first projecting growth in global economic output, then estimating the industry's share of that …
- Which approach to revenue forecasting is most likely to capture the effect of a new competitor entering a company's market?
- A retailer's analyst builds next year's revenue forecast by multiplying the expected number of stores by forecast sales per store, summed ac…
- When forecasting a company's gross margin, an analyst expects input prices to rise while the company has limited pricing power. The analyst …
- An analyst forecasts revenue growth and profit margins separately for each division of a conglomerate but does not check whether the sum of …