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Financial Modelling And Forecasting Question Paper
Financial Modelling And Forecasting
Course:Bachelor Of Commerce
Institution: Kenyatta University question papers
Exam Year:2011
EXAMINATION FOR THE DEGREE OF BACHELOR OF
COMMERCE
FINANCIAL MODELLING AND FORECASTING
DATE: AUGUST 2011 TIME: 2 HOURS
INSTRUCTIONS: Answer question ONE and any other TWO questions
Question One
a) In context of modeling, explain the meaning of: (9 Marks)
i) Analogue models
ii) Verbal models
iii)Descriptive models
b)Write brief notes on the critical determinants of a forecast (12 Marks)
c) Discuss the maxim “High causation certainly means high correlation but high correlation does
not certainly imply high causation” (5 Marks)
d)Discuss any two budgeting styles (4 Marks)
Question Two
HEC engineering Company Limited wishes to set flexible budgets for each of its operating
departments. A separate maintenance department performs all routine and major repair works on the
company’s equipment and facilities. The company has determined that maintenance cost is primarily a
function of machine hours worked in the various production departments. The maintenance cost
2
incurred and the actual machine hours worked during the months of January, February, March and
April 2010 were as follows:
Month Machine hours in production
departments
Maintenance department’s
costs
Sh.’000’
January
February
March
April
800
1,200
400
1,600
350
350
150
550
Required:
a) Determine the cost estimation function using:
i) High-low method (4 Marks)
ii) Regression analysis. (5 Marks)
b) Using the regression function estimate:
i) The maintenance costs that would have been incurred if the machine hours were
expected to be 900 in the month of May 2010. (2 Marks)
ii) The maximum machine hours that would have been worked if the maintenance cost
incurred had been limited to Sh.400,000 for the month of May 2010. (2 Marks)
c) Assuming that in the month of May 2010 machine hours were 900, establish a 95% confidence
d) interval for this point estimate, (assume Tc = 2.7764 and standard error of estimate, Se = 63.25.
(3 Marks)
e) Establish the nature, degree and the explanatory power of the predictor variable towards the
response variable. (4 Marks)
Question Three
a) State the principal components of a time series. (2 Marks)
b) i) Explain the difference between multiplicative and additive models as used in time series.
(2 Marks)
ii) State the conditions under which each model is used. (2 Marks)
c) The table below shows the sales of new cars by quarters during a period of three years:
3
Year Quarter 1
Sh.”million”
Quarter 2
Sh.”million”
Quarter 3
Sh.”million”
Quarter 4
Sh.”million”
2001
2002
2003
55.0
54.4
59.3
76.5
65.9
83.2
61.2
52.7
78.5
77.8
81.4
93.0
Required:
i) Explain the purpose of the seasonal index. (2 Marks)
ii)The seasonal index for each quarter assuming an additive model. (12 Marks)
Question Four
Moving averages are often used in an effort to identify movements in share prices. Approximate
monthly closing prices (in Sh. Per share) for Toys Children Ltd. For December 2000 through
November 2001 are shown below:
Required:
a) Plot a historigram for the above data (6 Marks)
b) Use exponential smoothing with a smoothing constant of ? = 0.35 to forecast the closing price for
December 2001. (14 Marks)
Question Five
4
The following information relates to RL Limited which manufactures three products A,B and C.
Product quantity unit price
(Units (sh)
Sales A 1000 100
B 2000 120
C 1500 140
Materials used in company’s products
Material M1 M2 M3
Unit cost Sh 4 Sh 6 Sh 9
Quantities used in: M1 M2 M3
(units) (units) (units)
Product A 4 2 _
Product B 3 3 2
Product C 2 1 1
Finished stocks: Product A Product B Product C
(units) (units) (units)
Quantities
1st January 1000 1500 500
31st January 1100 1650 550
Material stocks: M1 M2 M3
(units) (units) (units)
1st January 26000 20000 12000
31st January 31200 24000 14400
Required:
Using the information given, prepare budgets for the month of January, for
a) Sales in quantity and value, including total value. (5 Marks)
b) Production quantities (5 Marks)
c) Material usage in quantities (5 Marks)
d) Material purchases in quantity and value, including total value. (5 Marks)
(20 Marks)
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