CHAPTER 1

INTRODUCTION TO FINANCIAL MODELING Financial modeling is the task of building up an abstract representation of a real-life financial decision making situation; Financial modeling is creating a complete program, which helps you in coming to a decision regarding investment in a company or a project. Financial modeling is a mandatory activity for investment bankers, project finance persons, and peoples researching in equity. To be more specific, financial Modeling refers to the process of building a structure that integrates the Balance sheet, Income statements, Cash flow statements and Supporting Schedules to enable decision making in areas like, Business Planning and Forecasting, Equity valuation, Credit Analysis/Appraisal, Mergers/Acquisition Analysis, Project Appraisal etc. Financial Modeling is the process by which a firm constructs a financial representation of some, or all aspects of the firm, or given security. The model is usually characterized by performing calculations, and makes recommendations, based on that information. The model may also summarize particular events for the end user and provide direction regarding possible actions or alternatives. This is a model which is designed to represent the performance of a financial asset , a business, a project, or any other investment. Financial models can be constructed in many ways, either by the use of computer software, or with a pen and paper. What's most important, however, is not the kind of user interface used, but the underlying logic that encompasses the model. For example, preparing a model of capital budgeting decision , model of a cash budget, model of financial statements, etc. We have to resort it into a spreadsheet program for preparing a model. MS-Excel is the most popular spreadsheet program used by the industry and academia. A good financial model must have two characteristics - it must be accurate, and it must be prepared in minimum possible time. That is, accuracy and speed are the heart of a good financial model.

NEED FOR FINANCIAL MODELING Suppose, you have decided to learn financial modeling related to ratio analysis, So first you have to download some readymade models from internet. Select the simplest of them first. Try to understand the formulae used in the selected model. Then you may pick up your own data set - the best way of getting hold of a dataset is to get an annual report of a company. Then you may feed the Income Statement and Balance Sheet into two different sheets (but in one file) of a spreadsheet. Prepare a third sheet with all major financial ratios. Then start defining financial ratios with the help of any standard finance textbook. Finally link the relevant values of income statement and balance sheet of the selected company. Your own financial model on ratio analysis is ready! You will certainly gain greater confidence and accuracy via repeated practice. Financial modeling supports management in making important business decisions. It involves the quantification (measurement) of the potential impact of decisions, on the profit and loss account, balance sheet and cash flow statements. Through financial models, managers can determine the outcome of a proposal, before even its execution and rely on a rational and comprehensive justification for their decisions. Moreover, these models enable managers to study different options and scenarios without imposing any risk on the business. To avoid the common pitfalls related to financial modeling, designers should follow five(5) basic principles. They should make sure that (i)The model satisfies its objectives (ii)Maintain model flexibility (iii)Take inflation into consideration (iv)Present the model clearly and interestingly and (v)Measure outcome.

SCOPE OF FINANCIAL MODELING Applications of Financial Modeling on Excel:

Investment Banking : Financial Modeling helps Investment Banker in Valuing the company by forecasting the revenues. On the basis of Valuation they recommend the buyer or seller on acquisition of new funds or investments in new funds respectively.

Equity Research : Financial Modeling enables analyst in examining an organizations financial projections, competitors projections and other dynamics to determine whether it is a smart or a risky investment It is a Detailed research to recommend buy/sell price on companies under coverage. There are over 90,000 listed stocks on global exchanges and each one have to be valued on a regular basis Credit Rating : Financial Modeling equips Credit Analysts in collecting historical information & , outstanding debts and forecasting future growth on excel sheet to determine the degree of risk factor , which helps him/her in giving rating

Project Finance : Financial Modeling helps in assessing the financial possibility of a project and creating a funding plan through debt and equity components

Mergers & Acquisitions: Financial Modeling helps the companies in access the value of the company which they want to merge or acquire by forecasting the revenues , preparing debt schedule , by doing competitor analysis

Corporate Finance: Financial Modeling helps companies in assessing their own finances & build financial models for their on projects. & in creating a funding plan through debt and equity components

LIMITATIONS OF FINANCIAL MODELING The future direction of markets is highly uncertain. In short, no single model can contain all the necessary information to capture the uncertain path of outcomes. As a financial Modeling is a Analytical Study ,so that the result of study is Different from person to person and company.

The accuracy of a forecast depends on the quality of the data used as a basis for the financial models and projections. A company entering a new market space does not have any historical data on which to base the projections. Consumer behavior is complex. Consumers weight many different factors in their purchase decisions. Companies may not have a good understanding of which of these factors is most important.

LIMITATIONS TO STUDY Time period is less than 45 days Study limits to only Equity Analysis of a company

RESEARCH & METHODOLOGY OF STUDY

Data is collected through Secondary sources i.e. internet & Articles.

LETERATURE REVIEW