CFA Level I · CFA Level I Exam · Financial Statement Forecasting in Equity Valuation
Which statement best describes the main purpose of sensitivity analysis in a financial statement forecast?
Sensitivity analysis shows how a forecast output, such as EPS or value, changes when a single input is varied while others are held constant. It identifies which assumptions matter most. Assigning probabilities to combined outcomes is scenario analysis, and it does not replace the base case.
- ATo assign probabilities to discrete economic outcomes
- BTo show how forecast output changes when one input is variedCorrect
- CTo replace the base case with a single most pessimistic estimate
Explanation
Sensitivity analysis changes one assumption at a time, such as the operating margin, to see the effect on earnings or value. Assigning probabilities to combined outcomes is scenario analysis. It supplements rather than replaces the base case.
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