Two Forecasting Models Were Used to Predict the Future Values

question 7

Essay

Two forecasting models were used to predict the future values of a time series. These are shown in the following table, together with the actual values. $$\begin{array}{l}\text { Forecast Value } F _ { t } \quad \text { Actual Value } y _ { t }\\\begin{array} { | c c | c | } \hline \text { Model 1 } & \text { Model } 2 & \\\hline 8.2 & 7.7 & 7.6 \\7.8 & 8.5 & 8.2 \\7.0 & 8.5 & 7.6 \\9.6 & 9.0 & 10.3 \\\hline\end{array}\end{array}$$ Compute MAD and SSE for each model to determine which was more accurate.

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Definitions:

EBIT

Earnings Before Interest and Taxes, a measure of a company's profitability that excludes the effect of financial and tax decisions.

Depreciation

The allocation of the cost of an asset over its useful life, reflecting the decrease in value due to use and age.

Terminal Growth Rate

The rate at which a company's free cash flow is expected to grow at indefinitely, used in the discounted cash flow analysis to estimate a company's value.

Plowback Ratio

The proportion of earnings retained by a business, rather than paid out as dividends, to reinvest in its core activities.