Learn how Series 86 tests revenue, price, volume, mix, gross margin, operating expenses, D&A, interest, taxes, EPS, and income statement forecast discipline.
Series 86 expects the analyst to convert research into forward-looking numbers. Forecasting is not guesswork. It is the disciplined extension of what the analyst already learned about the economy, the industry, the company, and its accounting quality. This section focuses on projected income statements: revenue, gross profit, operating profit, interest expense, taxes, and EPS.
The exam usually rewards the answer that ties every income statement assumption to evidence. A revenue growth rate should be traceable to volume, price, mix, customer count, market growth, or segment assumptions. A margin forecast should be traceable to cost structure, operating leverage, input costs, pricing power, product mix, utilization, or management’s cost plan.
| Forecast area | Question to ask | Why it matters |
|---|---|---|
| Revenue | What drives volume, price, mix, customer growth, or segment growth? | prevents arbitrary top-line assumptions |
| Gross profit | What changes COGS, input costs, pricing, or mix? | connects revenue growth to margin quality |
| Operating expenses | Which costs scale and which are fixed or discretionary? | captures operating leverage and investment needs |
| D&A | Does depreciation follow capex and asset base assumptions? | keeps operating profit consistent with reinvestment |
| Interest expense | Does the rate and debt schedule support the assumption? | prevents financing costs from being ignored |
| Taxes | Is the effective tax rate reasonable and explainable? | affects net income and EPS comparability |
| EPS | Are share count, dilution, and buybacks modeled consistently? | links company actions to per-share valuation inputs |
Series 86 often tests whether the analyst can explain revenue instead of using a single unsupported growth percentage. A stronger forecast separates the drivers. Volume growth can come from market expansion, share gains, capacity, new products, or customer additions. Price can come from inflation pass-through, premium positioning, contract escalation, or discounting pressure. Mix can shift margins even when total revenue growth looks stable.
Segment or product forecasts are especially important when different businesses have different growth and margin profiles. A blended company forecast may hide the fact that a high-margin segment is shrinking while a low-margin segment grows.
Gross margin and operating margin forecasts should fit the business model. If the company is capacity-constrained, strong demand may require spending before margin improves. If the company faces input-cost inflation, the analyst should test whether pricing flexibility can offset it. If management promises cost savings, the analyst should decide whether the savings are structural, temporary, or already embedded in the run rate.
Series 86 also expects adjustment discipline. Known one-time items should be separated from ongoing earnings power. Corporate actions such as acquisitions or divestitures should be incorporated into the income statement in a way that makes the forecast comparable with the new business mix.
The outline emphasizes monitoring and adjustments. A research analyst is not supposed to set a model and defend it forever. Earnings results, revised guidance, macro shifts, input-cost changes, regulatory developments, and competitor actions may require changes to revenue, margin, interest, tax, or share-count assumptions.
The strongest exam answer distinguishes routine forecast updates from thesis-changing evidence. A minor quarterly timing issue may affect near-term EPS without changing long-term value. A structural margin reset, lost customer, or new capital need may require a deeper revision.
An analyst raises next year’s revenue forecast because demand is improving but leaves gross margin unchanged even though input costs are rising and the company has limited pricing power. What is the strongest Series 86 concern?
A. None, because revenue growth automatically improves margins B. The margin assumption may be unsupported because the cost and pricing evidence changed C. The analyst should ignore input costs if management is optimistic D. Gross margin is irrelevant because only EPS matters
Answer: B. Series 86 expects forecast assumptions to be evidence-based. Revenue, pricing power, cost pressure, and margin assumptions need to fit together.