Question #6
Reading: Reading 14 Financial Statement Modeling
PDF File: Reading 14 Financial Statement Modeling.pdf
Page: 4
Status: Unattempted
Correct Answer: A
Question
Davide Andreu is concerned about the possible impact of inflation on two German retailers that he covers in his equity analyst role. Andreu has used last year's financials to produce common size income statements for the two retailers as shown below. Tooboola GmbH Portentona GmbH Sales 100% 100% Cost of Goods Sold 38% 48% Gross Margin 62% 52% Sales, General & Admin 40% 20% Depreciation 5% 15% Operating Margin 17% 17% Andreu is forecasting inflation of 10% in cost of goods sold for both companies due to large increases in commodity prices in the next period. Due to the fragile state of the economic recovery does not expect either company to be able to pass these costs on to consumers. Sales, general and admin costs are likely to rise by 5% and accounting depreciation will be unaffected. If Andreu's forecasts are correct, which of the following statements is least accurate?
Answer Choices:
A. Tooboola has a larger forecasted gross margin than Portentona
B. Both companies will experience the same decrease in gross margin
C. The forecasted operating margins will be equal for Tooboola and Portentona
Explanation
Tooboola
Tooboola
Forecast
Portentona
Portentona
Forecast
Sales
100%
100%
100%
100%
Cost of Goods Sold
(x1.10)
38%
41.8%
48%
52.8%
Gross Margin
62%
58.2%
52%
47.2%
SG&A (x1.05)
40%
42.0%
20%
21.0%
Depreciation
5%
5.0%
15%
15.0%
Operating Margin
17%
11.2%
17%
11.2%
Tooboola's gross margin drops 3.8% to 58.2%. This is a relative drop of 6.1%.
Portentona's gross margin drops 4.8% to 47.2%. This is a relative drop of 9.2%.