Financial Forecasting Methods (Powerpoint)
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Financial Forecasting Methods
description
Explains the different methods in financial forecasting - Bayesian, Reference Class and Pro-forma Financial Statement Forecasting.
Transcript of Financial Forecasting Methods (Powerpoint)
Financial Forecasting Methods
P(A) is the probability of A occurring, and is called the prior probability.P(A|B) is the conditional probability of A given that B occurs. This is the posterior probability due to its variable dependency on B. This assumes that the A is not independent of B.P(B|A) is the conditional probability of B given that A occurs.P(B) is the probability of B occurring.
Bayesian Method
Bayesian MethodStock Price
Interest RatesUnit
FrequencyDecrease Increase
Increase 200 950 1150
Decrease 800 50 850
1000 1000 2000P(SI) = the probability of the stock index increasing
P(SD) = the probability of the stock index decreasingP(ID) = the probability of interest rates decreasingP(II) = the probability of interest rates increasing
= = = 0.9499 = 95%
Bayesian Method
Stock Price
Interest RatesUnit
FrequencyDecrease Increase
Increase 200 950 1150
Decrease 800 50 850
1000 1000 2000P(SI) = the probability of the stock index increasing
P(SD) = the probability of the stock index decreasingP(ID) = the probability of interest rates decreasingP(II) = the probability of interest rates increasing
= = = 0.2 = 20%
“Reference class” is a set of comparable projects with enough projects in the group to be statistically significant, but small enough that the projects are similar to the one that you are undertaking.
Outside view instead of inside view
Reference Class Forecasting
1. Identification of a relevant reference class
2. Establishing a probability distribution for the selected reference class
3. Compare with the reference class distribution
Reference Class Forecasting
Projected or “future” financial statements.The idea is to write down a sequence of
financial statements that represent expectations of what the results of actions and policies will be on the future financial status of the firm.
1. Income Statement2. Balance Sheet
Proforma Financial Statements
Actual Figures (March 31, ‘06) Assumptions Proforma
(June 30, ‘06)1.No.of units sold
2.Net Sales
3.Cost of Goods sold:4.Labour5. Materials6.Distribution cost7. Overhead8. Total9. Ratio of CGS to Sales.
14000
140000100%
2296025256459261992114800
82.0%
Sales decline 30% due to low demand.No change in Product mix.
20% of Cost of good22% of COG4% of COG
54% of COG
Increase by 1.5%
9800
98000100%
1636618002.63273.244188.281830
83.5%
Proforma Income Statement
Actual Figures Assumptions Proforma10. Gross Profit11. GP Margin12. Expenses:13. Selling Expenses14. Admin. Expense15. Others16.Total17. Operating Profit18. Interest19. Depreciation20.PBT21. Tax @ 30%22.Net Income23.Dividends24.Retained earnings.25. Cash flow after dividends.
2520018%
82504450Nil1270012500250020007000210049009004000
6000
A drop of Rs. 750 .A drop of Rs. 850
Rs.2000 only
No dividendsCarried to B/s.
Retained earning + Depreciation
1617016.5%
75003600Nil1110050702000200010703217490749
2749
Actual Figures (March 31, ‘06) Assumptions Proforma
(June 30, ‘06) Change
LIABILITIES:A. CAPITALB. R& S.(C+D)C. RESERVESD. P&L BalanceE. Total share
holders funds.
F. Total DebtG. Total
Liabilities (E+F)
65004500500400011000
750018500
Issue of shares Rs.500
P&L account.
70005250500475012250
750019750
+500+7500+750+1250
0+1250
Proforma Balance Sheet
Actual Assumptions Proforma ChangeASSETS:H. GROSS BLOCK (I+j)I. LANDj. Plant & MachineryK. LESS DEPRECN.L. NET BLOCK (J-K)M. CURRENT ASSETS
(N+O)N. INVENTORIESO. CASH. Less: P. CURRENT LIAILITIES.Q. ProvisionsR. Net current assets (M-P-Q)s. Total assets (L+R)t. Additional funds
required.
24000
300021000100001100014500
105004000
5000
20007500
18500
No changeSale of 1000Depreciation of 9500
Increase by 2000Maintain CB of 3500
Decrease by 1000
23000
30002000095001050016000
125003500
4000
200010000
20500
-1000
0-1000-500-500+1500
+2000-500
-1000
0+2500
+2000
