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Financial Modelling And Forecasting Question Paper

Financial Modelling And Forecasting

Course:Bachelor Of Commerce

Institution: Kca University question papers

Exam Year:2010

UNIVERSITY EXAMINATIONS: 2009/2010
SECOND YEAR EXAMINATION FOR THE DEGREE OF BACHELOR OF
COMMERCE
CFM 202-F : FINANCIAL MODELLING AND FORECASTING
DATE: AUGUST 2010 TIME: 2 HOURS
INSTRUCTIONS: Answer question ONE and any other TWO questions
QUESTION ONE
a) Distinguish between autocorrelation and multicolleneality. (4 Marks)
b) Identify any four limitations of regression analysis. (4 Marks)
c) Discuss the advantages of budgeting to an organisation. (4 Marks)
d) Differentiate between the additive model and the multiplicative model as used in time series
analysis. (4 Marks)
e) Distinguish between qualitative and quantitative forecasting (4 Marks)
f) The monthly electricity bill at the Fidelity ltd over the past 12 months has been as follows:
Month Amount (Sh.)
December
January
February
March
April
May
June
July
August
September
30,660
27,190
30,570
30,640
29,730
31,530
29,720
33,070
30,010
27,550
2
October
November
30,130
27,940
Paul is considering using exponential
index ? smoothing with
= 0.5 to forecast
future electricity sales
Required:
Determine next January’s forecast. (10 Marks)
QUESTON TWO
a) The following data relates to Akimbo Co ltd in relations to sales and cost of advertisement for the
year ended 30th June 2010
Sales (y)
sh’000’
170 240 260 300 220 250
Cost (x)
sh.’000’
20 40 50 60 30 40
Required:
i) Compute the relationship between sales and cost of advertisement (5 Marks)
ii) Forecast for sales if sh. 50,000 is spent on advertisement. (4 Marks)
iii) What would be the forecast sales if advertisement cost is sh.100,000 (3 Marks)
b) Explain the need for forecasting. (2 Marks)
c) You are provided with the following data.
Month Jan Feb March April May June July Aug Sept
Sales
‘000’
450 440 460 410 380 400 370 360 410
Required:
i). Conduct a three month moving average (4 Marks)
ii) Forecast the sales for the month of October (2 Marks)
QUESTION THREE
Flashy Cars Ltd. specializes in the import and sale of sports cars in Uganda. The Marketing manager
has been analyzing the demand for sports cars over the last three years. The table below shows the
quarterly demand for the sports cars and the seasonal multiplicative index for each quarter.
3
Number of sports cars demanded
Year Quarter 1 Quarter 2 Quarter 3 Quarter 4
2004 8 17 12 6
2005 12 20 17 9
2006 16 28 25 14
Required:
(a) A linear regression equation for the demand for sports cars. (5 Marks)
(b) Forecast the quarterly demand for year 2007 using the linear regression equation in (a) above.
(2 Marks)
(c) Deseasonalise the demand data of the sports cars using the seasonal multiplicative indices
provided. (4 Marks)
(d) Fit a linear regression to the deseasonalised demand in (c) above. (3 Marks)
(e) Use the trend equation in (d) above to determine the seasonally adjusted forecast for demand of
each quarter in year 2007. (2 Marks)
(f) Given the actual sales for year 2007 to be 21, 32, 28 and 20 sports cars for quarters 1, 2, 3 and 4
respectively, determine which of the forecasts in (b) or (e) above would be preferred.
(4 Marks)
(Total: 20 Marks)
QUESTION FOUR
Simiyu and Ochieng have set up a business named SO Entreprises as partners. The firm will venture
in the purchase and sale of toy cars with effect from 1 July 2008. The partners intend to inject a total
capital of Sh.23 million by 30 June 2008.
The projected sales for the first months and thereafter are as follows:
Month Projected sales (units)
July 2,400
August 3,600
September 4,800
October and monthly thereafter 9,600
Additional information:
1. The selling price per toy car would be Sh.700.
2. All sales would be on credit terms, requiring settlement two months after the date of sale.
However, if settlement was made by customers within one month of sale, a 2.5% cash
discount would be given.
4
3. Of the total sales, 60% are expected to be settled two months after the date of sale and 40%
(before any discount is deducted) are expected to be settled one month after the date of sale.
4. The purchase cost of each toy car is Sh.490. The firm intends to make purchases at the end
of each month in order to maintain sufficient inventory for sale in the following month.
5. Payment for purchases would be made one month in arrears.
6. Non-current assets are expected to cost Sh.17,500,000 payable on 1 July 2008.
7. Annual rent is expected to be Sh.1,680,000 and be payable quarterly in advance
commencing 1 July 2008.
8. Monthly wages are expected to be Sh.280,000 payable in the month they would be
incurred.
9. Other monthly overheads are expected to be Sh.420,000 half of which will be payable in
the month they are incurred and the balance one month later.
Required:
A monthly cash budget for SO Enterprises for the months of July, August, September, October and
November 2008. Your cash budget should indicate the expected net cash flow for the month and the
cumulative budgeted cash surplus or deficit at the end of each month. (14 Marks)
(Total: 20 Marks)
QUESTION FIVE
The management of Kiboko Ltd. want to establish the amount of financial needs for the next two
years. The balance sheet of the firm as at 31 December 2001 is as follows:
Sh.’000’
Net fixed assets
Stock
Debtors
Cash
Total assets
124,800
38,400
28,800
7,200
199,200
Financed by:
Ordinary share capital
Retained earnings
12% long-term debt
Trade creditors
Accrued expenses
84,000
35,200
20,000
36,000
24,000
199,200
5
For the year ended 31 December 2001, sales amounted to Sh.240,000,000. The firm projects that the
sales will increase by 15% in year 2002 and 20% in year 2003.
The after tax profit on sales has been 11% but the management is pessimistic about future operating
costs and intends to use an after-tax profit on sales rate of 8% per annum.
The firm intends to maintain its dividend pay out ratio of 80%. Assets are expected to vary directly
with sales while trade creditors and accrued expenses form the spontaneous sources of financing. Any
external financing will be effected through the use of commercial paper.
a) Determine the amount of external financial requirements for the next two years. (7 Marks)
b) (i) A proforma balance sheet as at 31 December 2003. (10 Marks)
(ii) State the fundamental assumption made in your computations in (a) and b(i) above. (1 Mark)

Financial Modelling And Forecasting Question Paper

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