Entête de question
Angela Green, an investment manager at Horizon Investments, intends to hire a new investment analyst. After conducting initial interviews, Green has narrowed the pool to three candidates. She plans to conduct second interviews to further assess the candidates’ knowledge of industry and company analysis. Prior to the second interviews, Green asks the candidates to analyze Chrome Network Systems, a company that manufactures internet networking products. Each candidate is provided Chrome’s financial information presented in Exhibit 1.
| Year-End | |||
|---|---|---|---|
| 2017 | 2018 | 2019 | |
| Net sales | 46.8 | 50.5 | 53.9 |
| Cost of sales | 18.2 | 18.4 | 18.8 |
| Gross profit | 28.6 | 32.1 | 35.1 |
| SG&A expenses | 19.3 | 22.5 | 25.1 |
| Operating income | 9.3 | 9.6 | 10.0 |
| Interest expense | 0.5 | 0.7 | 0.6 |
| Income before provision for income tax | 8.8 | 8.9 | 9.4 |
| Provision for income taxes | 2.8 | 2.8 | 3.1 |
| Net income | 6.0 | 6.1 | 6.3 |
Green asks each candidate to forecast the 2020 income statement for Chrome and to outline the key assumptions used in their analysis. The job candidates are told to include Horizon’s economic outlook for 2020 in their analysis, which assumes nominal GDP growth of 3.6 percent, based on expectations of real GDP growth of 1.6 percent and inflation of 2.0 percent. Green receives the models from each of the candidates and schedules second interviews. To prepare for the interviews, Green compiles a summary of the candidates’ key assumptions in Exhibit 2.
| Metric | Candidate A | Candidate B | Candidate C |
|---|---|---|---|
| Net sales | Net sales will grow at the average annual growth rate in net sales over the 2017–19 time period. | Industry sales will grow at the same rate as nominal GDP, but Chrome will have a two-percentage-point decline in market share. | Net sales will grow 50 bps slower than nominal GDP. |
| Cost of sales | The 2020 gross margin will be the same as the average annual gross margin over the 2017–19 time period. | The 2020 gross margin will decline as costs increase by expected inflation. | The 2020 gross margin will increase by 20 bps from 2019. |
| SG&A expenses | The 2020 SG&A/net sales ratio will be the same as the average ratio over the 2017–19 time period. | The 2020 SG&A will grow at the rate of inflation. | The 2020 SG&A/net sales ratio will be the same as the 2019 ratio. |
| Interest expense | The 2020 interest expense assumes the effective interest rate will be the same as the 2019 rate. | The 2020 interest expense will be the same as the 2019 interest expense. | The 2020 interest expense will be the same as the average expense over the 2017–19 time period. |
| Income taxes | The 2020 effective tax rate will be the same as the 2019 rate. | The 2020 effective tax rate will equal the blended statutory rate of 30%. | The 2020 effective tax rate will be the same as the average effective tax rate over the 2017–19 time period |