Chapter 6 – Prospective Analysis: Forecasting

Which of the following items are required to produce a forecasted future condensed income statement?
1. Tax rate; NOPAT margin; sales growth; interest rate on ending debt
2. Tax rate; asset turnover; NOPAT margin; sales growth
3. NOPAT margin; sales growth; interest rate on beginning debt; leverage ratio
4. Tax rate; NOPAT margin; sales growth; interest rate on beginning debt
Consider the following statement: “Sales growth tends to revert faster to its economy-wide average than operating asset turnover.” This statement is
1. True
2. False
Consider the following statement: “Operating ROA tends to revert faster to its economy-wide average than net financial leverage.” This statement is
1. True
2. False
Consider the following statement: “Net financial leverage tends to revert faster to its economy-wide average than financial spread.” This statement is
1. True
2. False
In cyclical industries, sales growth
1. Tends to move in line with economy-wide growth
2. Tends to approach zero
3. Tends to be negative during economic upturns
4. Consistently exceeds economy-wide growth
Company A reports the following series of quarterly earnings: Q1 = 0.250; Q2 = 0.300; Q3 = 0.280; Q4 = 0.270; Q5 = 0.250; Q6 = 0.320; Q7 = 0.290; Q8 = 0.285. An analyst assumes that company A’s quarterly earnings perfectly follow the time-series process described by the Foster model. Under this assumption, the analyst’s forecast of quarter 9 earnings is
1. 0.2550
2. 0.2425
3. 0.2750
4. 0.2625
Consider the following statement: “The Foster model does not take into account that quarterly earnings may exhibit a seasonal pattern.” This statement is
1. True
2. False

Chapter 6 – Prospective Analysis: Forecasting

Quiz