Seeing is believing!

Before you order, simply sign up for a free user account and in seconds you'll be experiencing the best in CFA exam preparation.

Find out more
Subject 7. Model Building and Forecasting PDF Download

The results of financial analysis provide valuable inputs into forecasts of future earnings and cash flow. An analyst can build a model to forecast future performance of a company. Techniques that can be used include:

  • Sensitivity Analysis. This is the study of how the variation in the output of a model can be apportioned to different sources of variation. (e.g., what will be the net income if more debt is issued?)

  • Scenario Analysis. This considers both the sensitivity of financial outcome to changes in key financial variables and the likely range of variable values. The least "reasonable" set of circumstances (low unit sales, high construction costs, etc.) and the most "reasonable" set are specified first. The financial outcomes under the bad and good conditions are then calculated and compared to the expected, or base-case, outcome. Even though there are an infinite number of possibilities, scenario analysis only considers a few discrete outcomes.

  • Monte Carlo Simulation. This is a risk analysis technique in which a computer is used to simulate probable future events and thus estimate the profitability and risk of a project. Random values of input variables are generated on a computer. The mean of the target variable is computed to measure the expected value. Standard deviation (or coefficient of variation) is computed to measure risks.

User Contributed Comments 0

You need to log in first to add your comment.
I was very pleased with your notes and question bank. I especially like the mock exams because it helped to pull everything together.
Martin Rockenfeldt

Martin Rockenfeldt

My Own Flashcard

No flashcard found. Add a private flashcard for the subject.

Add

Actions