An equity analyst is forecasting the next year’s n
An equity analyst is forecasting the next year’s net profit margin of a heavy equipment manufacturing firm, by using the average net profit margin over the past three years. In making his profit projection, he is concerned about the following three items:
·The company suffered losses from discontinued operations in each of the past three years.
·The most recent year’s tax rate was only one half the prior two years’ rate as a result of a fiscal stimulus.
·The company experienced gains on the sale of investments in each of the past three years.
Which of the following statements about the preparation of the forecast is most accurate? The analyst would:
A. use the most recent tax rate because that is the best predictor of future tax rates.
B. exclude the gains on the sale from investments because the company is a manufacturing firm.
C. include the discontinued operations because they appear to be an on-going feature for this company.
参考解答
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2024-11-11 16:13:33
Ans:B.
The company is a heavy equipment manufacturer - since gains on investments is not a core part of its business, they should not be viewed as an ongoing source of earnings.
A is incorrect. The change in the current tax rate is best viewed as temporary (in the absence) of additional information and should not be the basis of the calculation of the average tax rate.
C is incorrect. Discontinued operations are considered to be nonrecurring items (even though they have occurred in the past three years); they are normally treated as random and unsustainable and should not be included in a short-term forecast.
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