An equity analyst is forecasting the next year’s net profit margin of a heavy equipme
nt 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.