Forecasting and Capital Structure

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Sales Forecast Using Naïve Approach.
Naïve forecasting is a technique whereby the last period’s actual sales are used as the current period forecast without altering them or trying to create underlying factors. In naïve approach method, today’s results are used to predict tomorrow’s outcomes.
Year Actual Sales($) NaiveForecasting($) Error($)
2011 1,750,000 – 2012 2,000,000 1,750,000 250,000
2013 1,350,000 2,000,000 650,000
2014 2,250,000 1,350,000 900,000
2015 1,800,000 2,250,000 450,000
2016 1,950,000 1,800,000 150,000
2017 1,950,000 By using the naïve approach method, the sales of the next year is likely to be $1,950,000. It’s because in naïve approach method today’s sales can be tomorrow’s sales.
Sales Forecast Using Average Sales Approach
If sales have momentum, one can predict them easily. Averages are a degree of momentum. When forecasting sales using the average sales approach, one needs to know the total historical average. By using the following formula, one can easily determine the number of sales for the next period.
923925-56515= (1/n) *(Ai)
00

= (1/n) *(Ai)
59944076835i+1
00i+1
F
Period Actual Sales($) Forecast Sales($) Error($)
2011 1,750,000 – –
2012 2,000,000 1,750,000 250,000
2013 1,350,000 2,125,000 775,000
2014 2,250,000 1,866,666.67 383,333.33
2015 1,800,000 1,962,500 162500
2016 1,950,000 1,930,000 20,000
2017 1,933,333.33
When using the average sales approach the sales for the next year is likely to be $1,933,333.33.
Percentage Errors these are mostly used when comparing the performance forecast between unlike data sets since they are scale independent.

MAPE is used to measure the size of the error in percentage terms. It’s an average of the unknown percentage error.
1/nActual-Forecast/Actual/*100For naïve approach MAPE=2,400,00011,100,000*100%=21.6%
For average sales approach MAPE= 1590833.3311,100,000*100%=14%.
Worldwide widget manufacturing, Inc. balance sheet for the year ended 2016.
$$
Fixed assets3,500,000
Current assets2,500,000
49720502413001,250,000
001,250,000
Current liabilities1,250,000
504825024193500
4,750,000
Capital.
50482503200400Equity3,250,000
5153025168275Net profit4,000,000
7,250,000
Worldwide widget manufacturing, Inc. needs $2,500,000 from external sources to fund the expected growth since the AFN value is higher than the net current asset value. (Lee C.J., Lee F. C, 2016).

Work cited.
Lee C.J., Lee F. C. Financial analysis, planning & amp; Forecasting: Theory and application, The World Scientific publishing company, 2016.