Bottom-up analysis starts with analysis of an

individual company or its reportable segments.

Top-down analysis begins with macroeconomic
variable, often the expected growth rate of GDP
Question 7 to 11
Use the following information to answer Questions 7 through 11
Jorge Stanza is a sell-side equity analyst who covers Entertaining Kids, Inc., (ENK), a large retailer of children’s toys based in the United States.
Stanza is reviewing the ENK annual report that has just been released. At the moment, Stanza has a buy recommendation on the company, but
the impressive performance of some of ENK’s competitors and a recent product recall have led him to revisit his recommendation in depth.
The product recall involved an inflatable swimming pool that ENK manufactures and sells for children 4 years and over. Unfortunately, a
number of ENK customers have recently reported that an electrical problem in the pump caused injury to their children. After several such
incidents in the industry in the past months, it is expected that the government will step in to impose strict regulation covering the manufacturing
of all children’s toys in that category. Stanza wants to build this possibility into his five forces competitive analysis model by adding government
involvement as a sixth force.
Exhibit 1: ENK Five Forces Analysis
Force Threat to Factors
Profitability
Substitutes Medium ENK sells a wide range of toys from sporting goods to electronics. There has been a growing
trend for customers to prefer traditional hand-crafted toys made and sold by independent retailers.
Rivalry low ENK has a 55% share of the market and enjoys economies of scale that give it significant cost
advantages over competitors.
Bargaining power of low Inputs into the vast majority of products are widely available. Suppliers of game consoles are also
suppliers reliant on ENK to distribute their product.
Bargaining power of buyers low ENK sells directly to consumers who represent a highly fragmented group.
Threat of new entrants high ENK has established a large distribution network, and the large costs of replicating such a
network
Another significant concern is the near-term threat of increased inflation. Stanza fears that if ENK’s input costs rise due to a general rise in
prices, ENK will not be able to pass on the full increase in input costs to customers. Extreme weather events have already had an adverse effect
on food prices, leaving families with less discretionary income to spend on children’s toys. Exhibit 2 shows ENK’s current gross margin and two
possible scenarios if inflation of 5% is realized next year.
Exhibit 2: Gross Margin
Entertaining Kids, Inc. 2019 ($ million)
Revenue 13201
Cost of goods sold 8755
Gross profit 4446
Gross margin 33,7%

Scenarios Scenario 1 Scenario 2

Price increase for revenues 3% 5%
Volume growth (applied for both input and output) 2% 0%
Input cost increase 5% 5%

Stanza is also concerned about a new game console that was released in the final quarter of this year. Although ENK has an exclusive agreement
with the maker of the new console, the XTF 2500, Stanza is concerned that the sale of the new console will reduce sales of other consoles that
ENK currently sells. A significant segment of ENK’s revenue is currently generated by sales of consoles to both individual customers and also
to assisted living facilities (ALFs) that use the consoles as part of their rehabilitation program.
Exhibit 3: Current Year Sales Figures
2019 ($ million)
Existing console
Individuals 2640
ALFs 400
Total 3040
XTF 2500
Individuals 45
ALFs 0
Total 45
Exhibit 4: Forecasting Assumptions
1. Individual sales of the XTF 2500 will increase by 375% next year, but the new console
will not be adopted by ALFs.
2. Sales of existing consoles to ALFs will remain static.
3. Sales of existing consoles to individuals will shrink by 25% as a result of the XTF 2500. The new console is being billed as a game changer,
coming in at a price point not much higher than existing consoles but with significantly more features. Stanza has analyzed this year’s sales of
existing and new console using the data shown in Exhibit 3 and intends to forecast next year’s sales using the assumptions listed in Exhibit 4.
Question 7. Stanza’s intended treatment of government intervention in his competitive analysis model is:
A. consistent with Porter’s five forces approach.
B. inconsistent with Porter’s five forces approach, as government involvement should always be considered a reduction in the threat of new
entrants.
C. inconsistent with Porter’s five forces approach, as Stanza should analyze how government involvement affects all of the five forces.
Question 8. Stanza is most likely wrong regarding the threat to profitability resulting from the:
A. bargaining power of customers, because a highly fragmented group (i.e., a large number of low-volume customers) complicates pricing
strategy, which implies a high threat to profitability.
B. threat of new entrants, as the high costs of setting up a distribution network and new stores means there is a low threat to profitability.
C. bargaining power of suppliers, as the reliance of console suppliers on ENK gives ENK a high level of bargaining power.
Question 9. Which of the following statements regarding the inflation scenarios in Exhibit 2 is most accurate?
A. Scenario 1 would lead to an increase in gross profit but a decrease in gross margin.
B. Both scenarios would lead to an unchanged gross margin.
C. Only scenario 2 would leave gross profit unchanged.
Question 10. Using the information in Exhibit 3 and 4, total estimated revenue from consoles next year should be closest to:
A. $2,494 million.
B. $2,548 million.
C. $2,594 million.
Question 11. Regarding the choice of forecast horizon for a discounted cash flow model, which
of the following statements is least accurate? The forecast horizon:
A. for a highly cyclical company should be long enough to allow the company to reach a mid-cycle level of sales and profitability.
B. should be independent of the investment strategy for which the stock is being considered.
C. should be long enough to allow the full benefits from an acquisition to be reflected in the financial statements.
Question 12. Which of the following statements is correct when considering the purpose of financial statement forecasts?
A. Financial statement forecasts assess the earnings, cash flows, and assets of a firm
B. Financial statement forecasts provide information on Risk and Profitability of a firm
C. Financial statement forecasts are comprehensive projections of future operating, investing, and financing activities of a firm
Question 13. Two crucial features of financial statement forecasts are:
A. Optimistic and objective
B. Unbiased and objective
C. Pessimistic and subjective
Question 14. Choose the best answer when talking about how helpful a realistic financial statement forecasts to investors:
A. A realistic financial statement forecasts produce expectations of future payoffs to make well-informed investment decisions
B. A realistic financial statement forecasts inform investors about assets and liabilities of a firm currently
C. A realistic financial statement forecasts provide information to make a conservative investment
Question 15: Which of the following statements best describes the characteristics of a realistic forecast?
A. A realistic financial forecast should be based on the wishful strategy, comprehensive, and consistent with changes in macroeconomics
B. A realistic financial forecast should be based on the actual strategy, comprehensive, and consistent internally
C. A realistic financial forecast should be based on the actually executed strategy, comprehensive, internally consistent, and externally valid
Question 16. To predict revenue for a growing firm at early phase in technology industry, which of the following statement is most likely
appropriate?
A. Based on the profit margin of the industry
B. Based on the growth rate of sales of last three years and the indicators of the industry
C. Based on the current assets turnover
Question 17. Big Bear Corporation is the fast-mover in the construction industry in about 20 years. The main product line of Big Bear
includes high-rise buildings, luxury residence, and complex shopping malls. For the next five years, BOD of Big Bear Corporation found
the construction industry mature, so they wanted to enter into bridge building market. The average profit margin of bridge building
industry is 15%; the assets turnover of bridge building industry is 0.8. The average assets of firms in this industry are about USD 500
thousand. Big Bear Corporation plans to put USD 1.5 billion in the new investment. Which of the following statement is most likely
proper when considering about ROA of Big Bear Corporation?
A. ROA of Big Bear Corporation would be less than 12%
B. ROA of Big Bear Corporation would be equal to the industry
C. ROA of Big Bear Corporation would be higher than 12%
Question 18. To predict revenues for a stable grocery retail store, what is the most relevant indicator?
A. The ratio between cost of goods sold and revenues of prior years
B. The current assets turnover of last year
C. The growth rate of population in places where the store located
Question 19. A food producer with a recognized brand and reliable products on the market can increase its revenue in the future
because of which?
A. It can increase the price compared to competitors
B. It can increase the market shares due to the cheap price
C. It can increase the volume due to the mass distribution
Question 20. Which of the following statement is most likely relevant when talking about the forecast of revenue for pharmaceutical
firms?
A. Analysts should base on the revenue of peer firms to predict
B. Analysts should base on the disclosure information on R&D and prediction of specialist in pharmaceutical industry
 C. Analysts should base on the historical growth rate of revenue
Question 21. Eco-world Corporation is the leading Vietnamese steel manufacturer. BOD of this corporation is worrying about the
changes in this industry due to the trade war between China and America. The Chinese market accounts for 15% and the American
market is 65% of total revenues. Which of the statement is most likely relevant when talking about the forecast of revenue for Eco-
world next year?
A. Equal to this year
B. Increase by 15%
C. Decrease by 65%
Question 22. For a startup firm in a growing industry, when the projected assets are higher than the projected liabilities and
shareholders’ equity, which is the best alternative to balance the balance sheet?
A. Issuing more long-term debt
B. Reducing cash and cash equivalent
C. Investing more in financial assets
Question 23. Big Ben Corporation, a leading firm in technology industry, has negative difference between projected assets and projected
liabilities and shareholders’ equity. To rebalance, which of the following statement is at least likely correct?
A. Paying more debt
B. Reissuing treasury stocks on the open market
C. Increase payout ratio
Question 24. Which of the following reasons leads to the biased and subjective financial statement forecasts?
A. The ignorance of the changes in business environment
B. The risk and motivation of related stakeholders
C. The consideration of industry concentration
II. EXERCISES
Exercise 1. Projecting Income Statement
Big Pie Corporation has the following information:
- Revenues of year N is $10 billion
- Gross profit margin of year N is 30%
- Fixed cost (excluded depreciation): 10% of revenues
- Depreciation: $1.2 billion
Big Pie Corporation expects the inflation of the year N+1 is 5% but the unit price increases by 2%. The company also intends to invest $ 2
billion in machinery, which will be depreciated in 10 years by a straight-line method. Because an investment in fixed assets, the gross profit
margin of Big Pie Corporation is expected to increase to 35%. Assuming that the volume of year N+1 is equal to Year N; the proportion of fixed
cost (not include depreciation) is 10% of revenues; income tax rate is 20%; no deferred tax. Present the projected income statement for Big Pie
Corporation in year N+1.
Exercise 2. Classification of use of cash and sources of cash
Alpha Corporation has a projected balance sheet for the year N+1 as following:
Items Value (USD in millions)
ASSETS Beginning Ending
Current Assets 1,900 1,720
- Cash and Cash Equivalent 200 170
- Accounts Receivable 500 550
- Inventories 1,200 1,000
Non-current Assets 6,700 7,700
Net Fixed Assets 6,500 7,500
- Acquisition cost 10,000 11,500
- Accumulated Depreciation (3,500) (4,000)
Long-term financial investment 200 200
Total assets 8,600 9,420
LIABILITIES & SHAREHOLDERS’ REVENUES
Liabilities 3,100 3,450
- Short-term debt 2,000 2,300
- Accounts payable 700 750
- Employees payable 200 300
- Accrued payable 200 100
Shareholders’ Equity 5,500 5,970
- Contributed common shares 4,500 5,000
- Share Premium 500 520
- Retained Earnings 500 450
Total Liabilities & Shareholders’ Equity 8,600 9,420
- Making a table of use of cash and source of cash for Alpha Corporation year N+1.
- If the net income of the Alpha Corporation year N+1 is projected at $ 800 million, please calculate the operating cash flow of year N+1.
Assuming that the net income is all from operating activities, no gain/loss from transaction on disposal or selling of fixed assets, no provision.
Exercises 3 (10.5) Projecting Revenues, Cost of Goods Sold, and Inventory.
Use the following hypothetical data for Walgreens in 2014 and 2015 to project revenues, cost of goods sold, and inventory for Year +1. Assume
that Walgreens’s Year +1 revenue growth rate, gross profit margin growth rate, and inventory turnover will be identical to 2015. Project the
average inventory balance in Year +1 and use it to compute the implied ending inventory balance.
Walgreens (in millions) 2014 2015
Sales revenues $76,392 $103,444
Cost of goods sold $54,823 $76,520
Ending Inventory $6,075 $8,678
Exercise 4 (10.7) Dividends as a Flexible Financial Account.

The following data for Schwartz Company represents a summary of your first-iteration forecast amounts for Year +1. Schwartz uses dividends
as a flexible financial account. Compute the amount of dividends you can assume that Schwartz will pay in order to balance your projected
balance sheet. Present the projected balance sheet.
Items Year +1
Operating Income $58
Interest Expense (8)
Income before tax $50
Tax provision (@20%) $10
Net Income $40
Total Assets $200
Accrued liabilities $43
Long-term debt $80
Common stock at par $20
Retained Earnings at the beginning of Year +1 $34
Exercise 5 (10.8) Long-Term Debt as a Flexible Financial Account
For this exercise, use the preceding data for Schwartz Company. Now assume that Schwartz pays common share- holders a dividend of $25 in
Year +1. Also assume that Schwartz uses long-term debt as a flexible financial account, increasing borrowing when it needs capital and paying
down debt when it generates excess capital. For simplicity, assume that Schwartz pays 10.0% interest expense on the ending balance in long-
term debt for the year and that interest expense is tax deductible at Schwartz’s average tax rate of 20.0%. Present the projected income statement
and balance sheet for Year +1.