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Activity 1: Risk and Return.: 61Fin3Fmo - Financial Modeling Lab Activities 6 - Simulation Models
Activity 1: Risk and Return.: 61Fin3Fmo - Financial Modeling Lab Activities 6 - Simulation Models
Activity 1: Risk and Return.: 61Fin3Fmo - Financial Modeling Lab Activities 6 - Simulation Models
𝐸(𝑅) = ∑ 𝑅𝑖 × 𝑃𝑖
𝑖=1
𝑛
2
𝜎 = √∑(𝑅𝑖 − 𝐸(𝑅) ) × 𝑃(𝑅𝑖 )
𝑖=1
𝜎
𝐶𝑜𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡 𝑜𝑓 𝑣𝑎𝑟𝑖𝑎𝑡𝑖𝑜𝑛 =
𝐸(𝑅)
All the formulas that will be used in this exercise can be found above.
Requirement:
1. Create a model divided into three sections: Input, Calculation, and Output.
2. Base Case Calculation:
For the base case, where the debt to total asset ratio is set at 50% and the interest rate on
debt is 11%, calculate the following metrics in the output section:
• Expected Return on Equity (ROE).
• Standard Deviation.
• Coefficient of Variation.
3. Sensitivity Analysis using Two-Way Data Table:
Employ a two-way data table to analyze the sensitivity of the following factors:
• Sensitivity of Expected Return on Equity based on two variables: Interest Rate on
Debt and Debt to Total Asset Ratio.
• Sensitivity of Standard Deviation based on two variables: Interest Rate on Debt and
Debt to Total Asset Ratio.
• Sensitivity of Coefficient of Variation based on two variables: Interest Rate on Debt
and Debt to Total Asset Ratio.
Adjust the interest rate on debt across a range from 7% to 15%, incrementing by 1%.
Vary the debt to total asset ratio from 0% to 70%, incrementing by 10%.
4. Visualization with Scatter Plots:
Create three scatter plots, each with smooth lines and markers, to visually represent the
sensitivity of the following metrics:
• Expected Return on Equity.
• Standard Deviation.
• Coefficient of Variation.
Data table 1. Expected return
26.00%
24.00%
22.00%
Expected ROE
20.00%
18.00%
16.00%
14.00%
12.00%
10.00%
0% 10% 20% 30% 40% 50% 60% 70%
Debt to asset ratio
0.18
0.16
Standard Deviation
0.14
0.12
0.1
0.08
0.06
0.04
0% 10% 20% 30% 40% 50% 60% 70%
Debt to asset ratio
1.2
1.1
1
0.9
0.8
0.7
0.6
0.5
7% 8% 9% 10% 11% 12% 13% 14% 15%
Interest rate
MewMew Company
INPUT SECTION
Total Asset $14,000,000 Scenarios EBIT Probability Debt to asset ratio Interest rate
Tax rate 40% 1 $4,200,000 0.2 50% 11%
2 $2,800,000 0.5
3 $700,000 0.3
CALCULATION SECTION
Weight Value
Total Debt 50% $7,000,000.00
Total Equity 50% $7,000,000.00
Total Asset 100% $14,000,000.00
OUTPUT SECTION
The suggested model should appear as shown. Please note that this suggested model is not
the definitive "best" model; you are encouraged to create and arrange your model according to
your preferences.
Activity 2: Scenario analysis
Lynx Corporation. Financial Statements Analysis.
This exercise will be conducted using the provided Excel file: "Lab6_profitability_ratio".
Within the file, a model has been structured into three sections: Data, Calculation, and Output.
1. Data Section:
• The balance sheet and income statement for Lynx Corporation's past two years
(2008 and 2009) are included.
• Assumptions for items on the balance sheet and income statement are categorized
into Uncontrollable and Decision variables.
✓ Uncontrollable variables encompass the growth rate and tax rate. Growth rate relies on market
demand, while the corporate tax rate is influenced by government policies, making them
beyond Lynx Corporation's control.
✓ Controllable variables are considered decision variables as they can be influenced or controlled
by the firm. Forecasting the balance sheet and income statement is based on the percentage of
sales. Sales are forecasted first, and other variables are projected using Sales figures. For
instance, cost of sales = 71% x Sales.
• A “Base case” table has been established for use in Requirement 3.
2. Calculation Section:
Using the “cost of sales approach”, this model projects the balance sheet and income
statement for the year ending in 2010.
3. Output Section:
The output section has also been developed and structured.
Please keep in mind that this suggested “Output section” isn't the definitive “best” model.
You are encouraged to customize and organize your output section to align with your preferences.
Your model's effectiveness will contribute to 70% of your evaluation, with the remaining
30% attributed to model efficiency.
Requirement:
1. Calculation of Financial Ratios for 2010:
Calculate the following financial ratios for Lynx Corporation for the projected year
2010:
• Profit Margin
• Return on Assets (ROA)
• Return on Equity (ROE)
• Earnings per Stock
2. Sensitivity Analysis using Two-Way Data Table.
Utilize the two-way data table technique to analyze the sensitivity of Profit Margin and
ROE with respect to two variables:
• Growth Rate
• Cost of Sales
3. Sensitivity Analysis using One-Way Data Table.
Apply the one-way data table technique to analyze the sensitivity of Net Income to three
key variables:
• Net Sales
• Cost of Sales
• Selling and Administrative Expenses
Note: The Net Income of 2008 has been linked to the base case scenario (100%). Therefore,
the percentage change for each key variable in the data table should be based on the values in the
“Base case” scenario in the input section.
4. Visualization with Scatter Plot Chart.
Create a scatter plot chart with straight lines and markers to visually represent the changes
in Net Income for the year 2008. The changes should be based on the percentage variations of the
three key variables from the “Base case” scenario.
5. Scenario Manager Analysis.
Perform scenario analysis for the following three scenarios. Note that you want to find Net
Income of the company under the three scenarios (normal, optimistic, and pessimistic cases)
Consider alternatives if assumptions no longer hold true:
• The current plan is considered as "Basic plan" as it is the most likely outcome.
• The pessimistic alternative is as follow:
o Growth rate: 3%
o Cost of sales: 75%
o Other expense: 3%
o Accounts receivable: 3%
• The optimistic alternative is as follow:
o Growth rate: 7%
o Cost of sales: 65%
o Other expense: -2%
o Accounts receivable: 0.5%
$100,000.00
$50,000.00
Net Income
$0.00
70% 80% 90% 100% 110% 120% 130%
($50,000.00)
($100,000.00)
($150,000.00)
Percentage to base case