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Financial Modelling And Forecasting 2009 Question Paper
Financial Modelling And Forecasting 2009
Course:Bachelor Of Commerce
Institution: Kenyatta University question papers
Exam Year:2009
EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE
FINANCIAL MODELLING AND FORECASTING
DATE: DECEMBER 2009 TIME: 2 HOURS
INSTRUCTIONS: Answer ONE and Any other TWO Questions
QUESTION ONE
a) Differentiate horizontal and vertical analysis as used in financial forecasting (4 Marks)
b) Outline four considerations made by financial analyst in implementing a
financial model (8 Marks)
c) Explain three budgeting techniques that a business can adopt (6 Marks)
d) ABC Ltd wants to develop new guidelines for builders and consumers on
new home insulation. The company found the following in course of their research
MONTHLY
NATURAL GAS
CONSUMPTION
(Cubic feet) Y
THICKNESS OF
INSULATION(Inches)
X1
OUTDOOR
TEMPERATURE
(0F)
X2
30.3 6 40
26.9 12 40
22.1 8 49
Based on the sample results, the regression equation is
Y = 62.65 – 1.86X1 – 0.52X2
2
Required:
i) Interpret the equation (3 Marks)
ii) How much natural gas can homeowners’ expect to use per month if they
install 6 inches of insulation and the outdoor temperature is 40 degrees 0F (1 Mark)
e) Highlight four limitations of linear regression analysis as used in forecasting (8 Marks)
QUESTION TWO
The National Highway Association is studying the relationship between the number of bidders on a
highway project and the winning (lowest) bid for a project. Of particular interest
is whether the number of bidders increases or decreases the amount of the winning bid, and
sample of 15 projects were taken as follows;
Required;
a) Determine the regression equation and interpret the equation. Do more bidders
tend to increase or decrease the amount of the winning bid (13 Marks)
b) Estimate the amount of the winning bid if there were seven bidders (2 Marks)
c) Determine the correlation coefficient and interpret its value (3 Marks)
d) What is the importance of coefficient of determination (2 Marks)
NUMBER OF BIDDERS WINNING BID
(Sh M)
9 5.1
9 8.0
3 9.7
10 7.8
5 7.7
10 5.5
7 8.3
11 5.5
6 10.3
6 8.0
4 8.8
7 9.4
7 8.6
7 8.1
6 7.8
3
QUESTION THREE
The quarterly production of ball pens in millions since 1993 is given below
QUARTER
Required:
a) Determine the typical seasonal index for the production data using the
Ratio-to-moving-average method for each of the four quarters (15 Marks)
b) Give five reasons why a business should do cash flow forecast (5 Marks)
QUESTION FOUR
a) XYZ Ltd Balance Sheet as at 31st December 2006 was as follows:
Assets (Sh M) Liabilities (Sh M)
Cash 3.5 Accounts payable 9.0
Receivables 26.0 Accruals 8.5
Inventories 40.0 Long-term loan 6.0
Net fixed assets 35.0 Common stock 15.0
Retained earnings 66.0
122.5 122.5
The following information is also available;
1. Sales for 2006 were Sh 350 m
2. Net income of Sh 10.5m.
3. The company paid dividends of Sh 4m to common stock holders.
4. The company is operating at full capacity and sales were projected to increase by 20%
in the following year.
i)Assuming that all ratios remain constant, determine the company additional financing
required for the year 2007 (10 Marks)
ii) Prepare a pro forma balance sheet as at 31st December 2007 (5 Marks)
YEAR WINTER SPRING SUMMER FALL
1993 7 10 14 9
1994 6 11 17 9
1995 8 9 15 10
1996 10 12 16 10
1997 9 13 17 10
4
c) Differentiate seasonal and trend variations in business activities (5 Marks)
QUESTION FIVE
a) The dream of every business is to be able to tell about the future of their business.
Explain importance of financial forecasting to a business (10 Marks)
b) Outline five steps in developing a reliable financial forecast (10 Marks)
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