Question #1
Reading: Reading 14 Financial Statement Modeling
PDF File: Reading 14 Financial Statement Modeling.pdf
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Correct Answer: A
Question
Ben Lorson is analyzing the revenue growth of Symphonica Inc., a retailer of audio visual equipment. Relevant data for the last two years is shown below: 2013 2012 $ millions $ millions Revenue 1,408 1,375 Total market size 17,606 17,450 $ billions $ billions Nominal GDP growth 16,451 16,400 He is looking at three methods of predicting revenue for 2014: 1. Assume that Symphonica retains its 2013 share of the market for 2014, and the total market grows at the same rate as it did last year. 2. Assume that revenue growth rate is equal to previous year's nominal GDP growth rate. 3. A bottom-up approach which assumes that the growth rate of Symphonica's revenue will be the same as last year Which of the following statements regarding Lorson's forecast is most accurate?
Answer Choices:
A. Lorson’s bottom-up approach predicts the highest revenue for 2014
B. Lorson’s growth relative to GDP growth model predicts a higher 2014 revenue figure for Symphonica than his market growth and market share model
C. Lorson’s market growth and market share model predicts a higher 2014 revenue figure for Symphonica than his bottom-up approach
Explanation
Market growth and market share approach (method 1)
2013 market share
1,408/17,606 = 8.00%
2013 total market growth
17,606/17,450 − 1 = 0.89%
2014 total market
17,606 × 1.0089 = 17,763
2014 revenue Symphonica
17,763 × 8.00% = 1,421
(Alternatively, as market share is static, revenue growth = market growth = 0.89%)
Growth relative to GDP model (method 2)
2013 nominal GDP growth
16,451/16,400 − 1 = 0.31%
2014 revenue Symphonica
1,408 × 1.0032 = 1,412
Bottom-up (method 3)
2013 revenue growth
1,408/1,375 − 1 = 2.4%
2014 revenue Symphonica
1,408 × 1.024 = 1,442