Financial Analysis and Forecasting Coursework Example | Topics and Well Written Essays - 1750 words

Financial Analysis and Forecasting - Coursework Example analysis shows that there exist a perfect relationship between sales and assets. The value of R-square is 1 this shows a perfect relationship that will produce a best-line-of fit that passes through the origin. The proportionality assumption that the value of assets increases proportionally with sales is therefore, holds, and is true. B) Repeat the part a regression analysis assuming the given data. Under these conditions, does it appear that the proportionality assumption holds true? Explain. From the results obtained below, the R squared value is 0.906304 this shows a good relationship because the R square value tends to 1, which is usually a perfect relation. SUMMARY OUTPUT Regression Statistics Multiple R 0.952 R Square 0.906304 Adjusted R Square 0.875073 Standard Error 4.495916 Observations 5 ANOVA Â   df SS MS F Significance F Regression 1 586.5602 586.5602 29.01858 0.012533 Residual 3 60.63978 20.21326 Total 4 647.2 Â   Â   Â   Â   Coefficients Standard Error t Stat P-val ue Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept -50.9698 16.52736 -3.08396 0.053968 -103.567 1.627654 -103.567 1.62765 X Variable 1 3.246979 0.602756 5.38689 0.012533 1.328741 5.165216 1.328741 5.16522 From the above evaluation, it is clear that the best-line-of fit does not pass through the origin making the assumption not to hold true for sales and assets analyzed. This is because there is no close association between the dependent and independent variables in the study. C) Which of the preceding situations is likely to hold for most firms? What implications does your answer have for use of the percentage-of-sales-method? From the above situations, both cases have close range on R-square but the first is preferred most. The first situation is likely to hold for most firms because each firm will try as much as possible to ensure there is a good correlation between sales and assets. Any imbalance on these two variables may lead to collapse of the business because there migh t be too much expense in relation to company assets. Such a situation may result because of poor management and control of measures and standards. R is a measure of goodness of fit. Quantities neighboring 1 show a very suitable good fit. When the firm’s R is squared, it illustrates the percentage of changeability of y accounted for by x.In some other terms, most firms tend to ensure that their R-Square value stays or should not go below 0.95, as this will account for 95% of the changeability in y with respect to x. In business, usually an R-square values more than 0.9 are preferred, but it is essential to mark that even when a firm has an R-square value of 0.35, this implies that x is still demonstrating a considerable percentage of the y trait. Nevertheless, those below 0.5 are taken as somewhat inadequate for bivariate evaluation, since the related error is so wide. Multivariate analysis for firms is however, different. In addition, when applying mathematical associations t o forecast y given x, then the pact is to present an error = 2 ? SSE, but this resolution is not often the case. Implications on use of the percentage-of-sales-method Percentage-of-sales-method is an approach of forecasting cash needs by stating revenues and costs as percentage of sales, and from these percentages to develop a pro forma income statement. While predicating financial information