Financial Modeling Valuation

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Financial Modeling in Excel

2011
Agenda
Introduction and context

Understanding an integrated financial Model
Efficiently using excel preparation for modeling
Creating a template for integrated model
Summarizing financial statements
Building Integrated Model Financial Statements & Projections
Understanding recursion and iterative calculation
Using Iteration to update Integrated Model
Building Integrated Model Valuation
Advanced Modelling Concepts
Neev Knowledge Management Pristine
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Key Authorization
CFA Institute (2010-11)

Authorized Training provider CFA
Pristine is now the authorized training provider
for CFA Exam trainings . Pristine is largest
training provider for CFA in India with presence
across seven major cities.
FPSB India (2010-11)

Authorized Training provider -CFP
An authorized Education Provider for
Chartered Financial Planner Charter.
GARP (2007-11)
Authorized Training provider -FRM
Largest player in India in the area of risk
management training. Trained 1000+ students
in risk management
PRMIA (2009-11)
Authorized Training provider PRM/ APRM
Sole authorized training for PRM Training in
India. Largest player in India in the area of risk
management training. Trained 1000+ students
in risk management
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Key Associations*
Ernst & Young (2010)

Real Estate Modeling
Senior Associates were
trained on building
valuation models for real
estate
ING Vyasa (2010)

Infrastructure & Project
Finance
Bankers were trained on
making integrated
models for project
finance and
infrastructure.
Bank Of America
Continuum Solutions
(2010)
Finance for Finance
Associates were trained on
valuation and mergers
and acquisitions
Franklin Templeton
CFA (2010)
Students were facing a gap in
the overall understanding of
finance topics like corporate
finance, FSA and valuation.
Provided training for over 100
hours to bridge the gap
J. P. Morgan (2010)
Financial Modeling in
Excel
The Real Assets Group
were trained in Excel for
infrastructure and realestate modeling
Credit-Suisse India (2009)

Risk Management and Quant.
Analysis
IT Professionals of CreditSuisse India were trained on
risk management.
Mizuho (2010)
Bankers were using excel models
that they could not
understand. Conducted
financial modeling in Excel
trainings to bridge the gap
HSBC (2008)
Risk Management and Quant.
Analysis
New joinees in HSBC had a gap in
knowledge of Risk Management
and quantitative skills. Conducted
trainings (On campus) to bridge the
gap
*Indicative List
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Key Associations
NUS Business School (2011)

Second year MBA students
were given a full 2-day
workshop on creating financial
models. They learnt how to
create integrated models of
valuation.
IIT Delhi (2009)

Corporate finance
Students get placed in finance
companies (UBS, GS, MS, etc)
with no understanding of the
subject/ Job Profile. Conducted
workshop to bridge the gap
IIM Calcutta (2010-11)
FMS Delhi (2010-11)

Students about to go for internships
and join jobs found a gap in their
grasp of knowledge of excel for
financial modeling. Conducted
training for 75+ students with an
average rating of 4.5+

Final Year MBA students of Faculty
of Management Studies, Delhi
University were trained in financial
modeling so as to prepare them
better for a job in finance.
BITS Pilani (2009)

Workshops on Basics of
Finance
Most of the students desire a
career in finance. Conducted
training for 350+ students with
an average rating of 4.5+
NISM (2008-11)
Derivatives in Hedging (2008)
Financial Modeling (2011)
Corporate in Ludhiana incurred huge
losses because of derivative trades
(for hedging). Conducted trainings
for directors and CFOs for better
understanding of derivative products
IEMR Delhi (2010-11)
SIMSREE (2010)

Final Year MBA students of IEMR
went through extensive financial
modeling workshop to acquire skills
of financial modeling.
Final Year MBA students of

Sydenham MBA, Mumbai were
trained in financial modeling so as
to prepare them better for a job in
finance.
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Excel as the most important tool for modeling

Excel is one of the most widely used tools in financial industry
Easy to use
High reach & access to software across geographies
Flexibility
Robustness
Inbuilt features (Most people would not even be using 95% of the features) & Extendibility
Modular and Object Oriented Architecture
Excel as a data-store
Easy to store and retrieve information
Flexibility to put many data-types in the same sheet
Functions and a range of features

Excel is easily extendible to be used as a Modeling tool
Modeling Context
Understand the industry models being used

Create your own models Rather than just using them
Improve & enhance productivity in work
Extend these models for your use
Debug Problems
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Decision Making based on Financial Analysis

Financial Transactions
Analyzed
Entered in the computer
Documents
Reports
Analyzed
Adjusted
Final reports prepared
Computers for
Record keeping
Our area of
focus
Computers for
Analysis
Reports
Financial statements
Prepared
Sent to relevant stakeholders
IS
BS
SCF
Financial Statements
Reports
Analyzed
Decision making purposes
Analysis and Decision Making
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Business reflected in the Statements
Operating
Research
Purchases
Marketing
Sales
Planning
Bank debt
Corporate bonds
Shareholder equity
Financing
Investing
Working capital
Land
Buildings
Machines & equipment
Intangibles
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Agenda

Modelling Advanced Accounting Concepts
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What is an integrated model?
Having all financial statements and analysis linked with each other, such that updating any part of the model
updates the complete workbook
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What is involved in creating an integrated model??

Correct formatting of sheets
and numbers for easy
interpretation and printing
Logically breaking your sheets

into different components
Integrated
financial
model
With the change in any
key variable, should give
an overall view of all the
changes in decision
parameters
Formulas & Linking numbers

in different sheets for
correctly updating the model
Conditional formatting, circular

references, scenario analysis
and other advanced tools like
solver, etc.
Effective modeling involves an indepth understanding of

financial concepts and MS Excel usage
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How is an integrated model created?
Data Source
Financial Statements
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Analysis
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Integrated financial model A Schematic Flow Diagram

Assumptions
Revenue Drivers
Revenue Build Up
Cost Drivers
Cost Build Up
P&L
Interest
Depreciation
Cash Flow
Valuation
Asset
Assumptions
Asset Schedule
Balance Sheet
Net Block
Financing
Assumptions
Debt Schedule
Debt
Valuation
Assumptions
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Key aspects of Modeling & Excel Usage

Building a ROBUST model is a must for other people to use your model
It should generate the correct results

It should have proper area for Inputs/ Outputs
It should be able to handle errors properly
Naming/ Labeling of data items should be done properly
Accidental changing of model parameters should be avoided
The model should be easy to understand on computer and in printout
Reusable components can be made in the excel sheet, which can be made later
SPEED is the key in modeling

A large model might have multiple excel sheets and a lot of formulas and calculations. It is necessary to
navigate through the excel sheet in a speedy manner and understand it
It is a fact that mouse is 5 times slower than using the keyboard to use excel. Due to heavy involvement
of the users, having a strong command over the keyboard shortcuts is a must!
A well designed excel sheet is easy to understand as well
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Agenda

Modelling Advanced Accounting Concepts
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Lets take a moment to understand components of Excel

Toolbar
Formula Bar
Cells
Worksheet
Name
Excel 2007 Interface

Excel 2003 and 2007 are being widely used in the industry. Most of features of 2007 are backward compatible
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CTRL + S
CTRL + C
CTRL + V
CTRL + X
CTRL + Z
CTRL + A
CTRL + B
ALT + TAB
ALT + F4
CTRL + TAB
CTRL + ALT + V
CTRL + 9
SHIFT + CTRL + 9
CTRL + 0
SHIFT + CTRL + 0
ALT + H + O + I
SHIFT + F11
SHIFT + Spacebar
CTRL + Spacebar
SHIFT + ALT +
SHIFT + ALT
CTRL + Minus sign
F2
Basic Editing and Saving Excel

Save Workbook
Copy
Paste
Cut
Undo
Select All
Bold
Switch Program
Close Program
Switch workbooks
Some Special Shortcuts
Paste Special
Hide Row
Unhide Row
Hide Column
Unhide Column
Fit column width
New worksheet
Highlight row
Highlight column
Group rows/columns
Ungroup rows/columns
Delete selected cells
Edit cells
CTRL + 1
ALT + H + 0
ALT + H + 9
SHIFT + CTRL + ~
SHIFT + CTRL + !
SHIFT + CTRL + #
SHIFT + CTRL + $
SHIFT + CTRL + %
CTRL + ;
= (equals sign)
ALT + =
CTRL +
CTRL + ~
F9
SHIFT + CTRL + Enter
ALT + M + P
ALT + M + D
ALT + M + A + A
CTRL + [
CTRL + ]
F5 + Enter
SHIFT + CTRL + {
SHIFT + CTRL + }
Navigating / Editing
Arrow keys
CTRL + Pg Up/Down
CTRL + Arrow keys
SHIFT + Arrow keys
SHIFT + CTRL + Arrow
Home
CTRL + Home
SHIFT + ENTER
TAB
SHIFT + TAB
ALT +
Move to new cells

Switch worksheets
Go to end of continuous range Select a cell
Select range
Select continuous range
Move to beginning of line
Move to cell A1
Move to cell above
Move to cell to the right
Move to cell to the left
Display a drop-down list
ALT + ENTER
SHIFT + Arrow
SHIFT + CTRL + Arrow
F4
ESC
Formatting
Format Box
Increase decimal
Decrease decimal
General format
Number format
Date format
Currency format
Percentage format
Enter the date
Formulas
Start a formula
Insert AutoSum formula
Copy formula from above cell
Show formulas/values
Recalculate all workbooks
Enter array formula
Auditing Formulas
Trace immediate precedents
Trace immediate dependents
Remove tracing arrows
Go to precedent cells
Go to dependent cells
Go back to original cell
Trace all precedents (indirect)
Trace all dependents (indirect)
Inside the cell Editing
Start new line in same cell
Highlight within cells
Highlight contiguous items
Toggle $
Cancel a cell entry
Change all Inputs to Blue:

Press F5 then Select "Special" then "Constants", "OK then Manually change
selection to blue font color
Change all Formulas to Black: Select "Formulas" instead of "Constants then
change selection to black color
Cell Referencing - $
Use $ for Absolute Reference
A1 vs $A1 vs A$1 vs $A$1
What happens when you copy paste cells
Source
Destination
$A$1
$A$1
A$1
C$1
$A1
$A3
A1
C3
Change the referencing of a cell by F2 + F4
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Agenda

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Creating the template for financial modeling

Matrix Integrity across sheets and tower model for within the sheet
Tower Model within sheet

Reduce the size of the first 1-2 columns to create
the headings
Ctrl + arrow keys to move faster from 1 section to
another
Larger column width to put in the names and text

information
Matrix integrity to be maintained across multiple

sheets
Eases copy paste and faster dragging of formulas
Reduces chances of errors in writing the formulas
linked across sheets
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Freeze panes at the right spots to ease navigation in the model
The years (indicating Actual and Projected) are put in one of the top row
Rows and columns are frozen at the intersection of the left hand information column and the years
row at the top
Hint: Shortcut Alt + w + f
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Agenda

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Introduction to Income Statement
Non Cash
Expenses
Revenue
Wages
material
Cost of
Goods Sold
Overhead
Depreciation
Gross Profit
Salary
Sales
SG&A
Marketing
EBITA
Amortization
Operating Profit (EBIT)
Interest
Profit before tax
Income
Tax
Deferred
Taxes
Net income
Taxes
Net
Income
Production
Employees
Suppliers
Employees/
Suppliers
Non-Cash Support Staff
Sales
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Advertising
Non-Cash
Debt
Investors
Govt.
Non-Cash
Equity
Investors
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Introduction to Balance Sheet
Current Assets
Current Liabilities
Sources of Funds
Long-term
Investment
Fixed Assets
(Property, Plant &
Equipment)
Use of Funds
Long-term Liabilities
Shareholders Equity
Capital Stock
Additional Paid-in
Capital
Intangible Assets
Retained Earnings
Other Assets
Total Assets = Total Shareholders equity + liabilities
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Cash Flow
Cash Inflow
Cash Outflow
From Operating Activities
To Operating Activities
Decrease in inventory(sale)
Decrease in a/c receivable
Increase in a/c payable
Increase in bills payable
From Investing Activities

Disposal of property, plant,
equipment
Disposal of intangibles
Receipt of interest
Receipt of dividends
To Investing Activities
Purchase of fixed assets
Purchase of intangibles
Acquire business
From Financing Activities
To Financing Activities
Issue of equity
Borrow debt
Increase in a/c receivable

Increase in inventory
Decrease in a/c payable
Decrease in bills payable
Taxes paid
Interest paid
Repay debt
Buyback equity
Pay dividend
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Adjustments in Cash Flow Statement
Add to
Net Income
Current assets
Accounts receivable (net)
Inventory
Prepaid expenses
Current liabilities
Accounts payable
Accrued liabilities
Income taxes payable
Depreciation expense
Amortization expense
Depletion expense
Losses
Gains
Change in Current Assets
Effect on
Net Income
Deduct from
Net Income
Non Cash Items
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Working of a company Financial Perspective

2
Balance Sheet
ASSETS
Current (ShortTerm)
Fixed (LongTerm)
Other
Capital Supplied
LIABILITIES
Current
Long-term
Debt
Shareholders
EQUITY
Cash Flow
Stock
Retain
Return
Sell Equity
Issue Debt
<Buy Assets>
<Buy Inventory>
Make Sales
<Pay Costs>
<Pay Taxes>
Retain Profits of
repay debt-holders
(with Interest) and
stock holders with
dividend
<Pay Interest>
<pay Dividends>
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Agenda

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Agenda Building an Integrated Financial Model
Integrated Model Inputting the Historical numbers

Integrated Model Calculating drivers
Integrated Model Forecasting P&L and Balance Sheet
Integrated Model Creating Asset and Depreciation Schedule
Integrated Model Creating Debt Repayment Schedule
Integrated Model Creating Cash Flow Schedule
Using Iteration to update Debt schedule
Integrated Model Updating debt schedule
Integrated Model Ratio analysis
Integrated Model Valuation by DCF
Integrated Model Valuation by Comps
Integrated Model Football Field and Scenario Analysis
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Start building the model by inputting the historical numbers

P&L and Balance sheet
Input the historical numbers in different font color (usually Blue) for easy identification
Use the subtotals as formulae and not constants
All formulas are inputted in different colored font (usually Black)
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Build integrity checks in the model
The balance sheet has to

balance each year
Check for the total liabilities to
be equal to total assets
Conditionally format the cell to
clearly indicate errors
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Building the assumptions in the model

Historical growth drivers for P&L
Historical
Growth
P&L drivers
Growth rate/ CAGR in the sales
Cost/ Other accounts as
%age of sales
Component cost estimates
(Bottom up measure)
%age of other accounts
Depreciation and interest to be

factored in separately
CAGR over
the past few
years
Bottom up
estimate of
components
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Historical growth drivers for Balance Sheet
Balance sheet drivers

Cost/ Other accounts as
%age of sales
Days of inventory/ payables, etc
%age of other accounts
Net debt and Gross/ Net Block to be

factored in separately
Component cost estimates (Bottom
up measure)
Days of Asset = {(Beginning Asset + Ending Asset)/2}/(Sales in the year/ 365)
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Projecting for P&L
Project the growth drivers for the
future based on
Management discussion
Research reports
Sanity check on historical
numbers
Using the projected drivers
CAGR over
the past few
years
Project the figures for future
Based on the assumptions, create

the projections for P&L
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Projecting for P&L
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Projecting for P&L
Items yet to be projected
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Projecting for Balance Sheet
Using the projected driver, create projections for future balance sheet assets/ liabilities. Specially
useful for working capital accounts like
Inventory
Accounts receivable
Accounts payable
Ending Asset = {(Days of Asset)*(Sales in the year/ 365)*2} - Beginning Asset
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Projecting for Balance Sheet
Items yet to be projected
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Projecting Capex schedule and depreciation expense
Build the assumptions regarding the capex schedule
Capex
Assumptions
Can be obtained from discussion with the management

Can be broadly based on the sales assumption, incase management discussion is not available
Capex would generally not follow a linear growth with sales. It would be step growth
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Based on the depreciation policy of the
company project the depreciation for each
of the investments for each of the years
Usually SLM is used for accounting
purpose
Separate depreciation can be projected for
tax purpose, which can lead to deferred
tax asset/ liability (To be covered
separately in advance accounting
concepts)
Capex divided by
its Asset Life
Total
Depreciation in
FY10E
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Gross Block
Item is
Calculated
Similarly, Accumulated
Depreciation is
Calculated
Once depreciation is known, the Gross Block and Acc. Depreciation is calculated and corresponding
Balance Sheet and P&L cells are filled up by linking them to the Asset Schedule sheet
Net Block of Fixed

Assets
Depreciation Item
in P&L linked to
Asset Schedule
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Way forward ...

Assumptions
Built
Partly Built
Revenue Drivers
Revenue Build Up
Cost Drivers
Cost Build Up
P&L
Interest
Asset
Assumptions
Cash Flow
Valuation
Asset Schedule
Balance Sheet
Net Block
Financing
Assumptions
Depreciation
Debt Schedule
Debt
Valuation
Assumptions
To be Built
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Constructing the Debt Schedule

Assumptions for Repayment
Schedules are filled in
Secured and Unsecured

Loans are calculated in the
Debt Schedule Sheet
Balance Sheet is updated

with the figures for Secured
and Unsecured Loans
The Debt Schedule is constructed in 3 simple steps:

Debt Repayment and New Issue Assumptions are put into the Assumption sheeet
The Secured and Unsecured Loans are calculated in Debt Schedule sheet on that basis
The corresponding cells in Non-current Liabilities portion of Balance Sheet are updated by appropriate links
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Creating the links for Interest Expense and Taxes

Average Loan Outstanding is
calculated
Interest Expense is calculated by

multiplying interest rate with the
average loan outstanding
The interest expense is calculated on the average loan outstanding

The taxes are calculated by
multiplying the PBT with
assumed tax rate
The taxes are calculated in P&L by multiplying PBT with Tax rates in Assumption sheet
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Building the Cashflows Operating Cashflow

We begin the Cashflow sheet
by sourcing PAT and
depreciation from the P&L
sheet and interest expense
from the Debt Schedule Sheet
Next, we calculate the Net

Change in Working Capital by
adding increase in Current
Liabilities Items and subtracting
increase in Current Assets
Items from the Balance Sheet
(except the cash line item)
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Building the Cashflows Investment and Financing Cashflows

We calculate the Cashflow
from Investing Activities by
linking the Cashflow to Capex
(Sale of Assets) assumptions
and changes in WIP and
Investments from Balance
Sheet
The Cashflow from Financing

Activities are obtained from
Assumptions on Equity Issue
and Debt Issue (Repayments),
and Dividends paid
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Building the Cashflows Formulas in the Cells

The column-wise formulas in the cells of Cashflow sheet are shown below
Once the Cashflow is prepared, the Closing Cash Balance (which is sum of Opening
Balance and Net Cashflow in the same year) is fed into the cell for Cash & Cash
equivalent in the Balance Sheet
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Agenda

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Circular References Issues and Use

When a formula refers back to its own cell
either directly or indirectly
But you might need to iterate to find your

solution
Significantly impacts performance as it can

iterate indefinitely
Generally because of errors in dragging and
dropping formulas
If you get an error in your sheet, it can
propagate throughout your model and might not
go away
Excel gives a warning
Use Example C
Circular reference is like a recursive definition

Can be used for repeated recalculation until the
error reduces to insignificant number
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Recursive problems
Consider the following problem
Pristine starts business with a balance of Rs1000
Mn in bank
Pristine has negotiated a deal with its bank that it
would be paid an interest (Floating) on average of
opening balance and closing balance for the
month to be fixed at the start of the month
Pristine has a requirement of Rs. 5 Mn Cash
each month
Create the cash schedule for Pristine
Issue:
Closing balance is dependent on interest earned
and interest earned is dependent on closing
balance!
Create a complete model for the problem
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Using Circular Reference for recursive problems

Turn on Iterative Calculation in Excel
to let excel iterate and find a solution
to the problem
Clear difference in results because

of iteration
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Remember Iteration is a double edged sword!
Always put switches in your model to turn off

iterative calculations
Enables faster loading of sheets
Enables debugging of your model
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Agenda

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Circularity in the Integrated Model

A fully integrated financial model in excel will have circularity in it due to the following circular linkage
Interest Earned (Expense) feeds into PAT on the P&L sheet

PAT feeds into the Cashflow sheet
Cashflow sheet in turn determines the balancing Cash / (Overdraft) for the year
Finally, the Outstanding Cash / (Overdraft) determines the Interest Earned / (Expense)
Interest Earned /
(Expense)
Debt Schedule Sheet
Cash / (Overdraft)
PAT
Balance Sheet
P&L Sheet
Cash Flow
Cashflow Sheet
Circularity in the model due to linkages between Cash/ (Overdraft) and Interest Earning / (Expense)
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Using circular referencing for incorporating

overdraft facility in financial model
Debt Schedule Sheet
P&L Sheet
Balance Sheet
Cashflow Sheet
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Building the Overdraft Facility

To incorporate the over-draft facility, we input the assumptions for the interest rates earned (or expensed)
on Outstanding Cash Balance (Over-draft amount)
The Outstanding Cash (Overdraft) is sourced into the Debt Schedule sheet from the Cashflow Sheet
Then, we calculate the interest earned (expensed) on the Cash (Overdraft) Balance using the interest rates
assumed
Interest Earned (or Expensed) is interest rate

on Cash (Overdraft) multiplied by
Outstanding Cash (Overdraft)
Net Interest Expense is Interest Expense on Outstanding Debt minus

Interest Earning (Expense) on the Outstanding Cash (Overdraft)
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Building the Overdraft Facility

We now update the link in the interest expense row in P&L, by sourcing it from the Net Interest Expense
row in the Debt Schedule (which also includes interest earning/ expense from cash/ overdraft amount)
Finally, we incorporate another row for Overdraft facility in the Current Liabilities section in Balance Sheet
The formula in the cells corresponding to Cash Balance and Overdraft Amount are linked to Closing
Balance in the Cashflow by using MAX and MIN functions as shown below
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Ratio Analysis
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Ratio Analysis Profitability and Growth Ratios

Profitability Ratios
Profitability ratios determine the profit margins made by a Company
We can calculate EBITDA margin, EBIT margin, PBT margin and PAT margin by dividing EBITDA,
EBIT, PBT and PAT by Revenues respectively
The Y-o-Y trend in the margins convey important information about improving or deteriorating cost
structure of the company
EBITDA margin is
EBITDA divided by
Revenues
PAT margin is PAT

divided by
Revenues
Growth rates determined

as (Current Year Value
Last Year Value) / Last
Year Value
Growth Ratios
Growth in different P&L line items are calculated as
(Current Year Value Last Year Value)/ Last Year Value
The trend in growth rate can be increasing, stagnant or
falling, depending on the phase of the company product
in its product life cycle
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Ratio Analysis Return Ratios and Leverage Ratios

Return Ratios
The return ratios shows percentage return earned by company assets (in the case of RoA) or the
equity owners (in the case of RoE)
Equity investors would typically be interested in earning a minimum hurdle rate in their investments. In
such cases, the investors look at the return on average equity (RoAE) for guidance
Return on Average Equity
(RoAE) is PAT divided by
Average Equity
Interest Coverage is
calculated as EBITDA
divided by Interest Expense
Leverage Ratios
Leverage ratios indicate the extent to which a company
is debt levered. Therefore, higher the proportion of debt
funding as % of total capital, higher is the leverage ratio
Interest Coverage ratio, calculated as EBITDA divided
by Interest Expense, indicates the no. of times the
interest obligation is secured by the operating level profit
Similarly, the quick ratio indicates liquidity of the company to serve immediate payment commitments
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Agenda

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Valuation
Valuation
Relative
Valuation
Absolute
Valuation
Equity Valuation
P/ E Multiples
Enterprise Valuation
EV / EBITDA Multiple
EV / Sales Multiple
Equity Valuation
Free Cash Flow to Firm (FCFF)
Enterprise Valuation
Free Cash Flow to Equity (FCFE)
Dividend Discount Method (DDM)
Multiples can be calculated from both

trading comps or transaction comps
Enterprise Value
Enterprise Value,
calculated as sum of
Equity and Net Debt
Cash
Net Debt1
Debt
Assets
Equity
Assets
Equity Value
Equity Value calculated
as No of shares
multiplied by Share Price
Equity
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1 Net Debt = Debt - Cash
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Absolute Valuation Technique

Free Cash Flow to Firm (FCFF)
Free Cash Flow to Firm represents the cash flows to the enterprise, which includes cash
flows to both debt and equity investors
FCFF is calculated as:
FCFF = EBIT X (1 Tax Rate) + Depreciation Capex Increase in Working Capital
FCFF has to be discounted by the Weighted Average Cost of Capital (WACC) of the
company, to arrive at the enterprise value
Free Cash Flow to Equity (FCFE)
Free Cash Flow to Equity represents the cash flows to the equity investors only, after
servicing obligations towards debt investors
FCFE is calculated as:
FCFE = PAT + Depreciation Capex Increase in Working Capital + New Debt Issues
Principal Payment on Debt
FCFE has to be discounted by the Cost of Equity to arrive at the equity value
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Using Free Cash Flow to Firm (FCFF) to arrive at Enterprise Value

We calculate the Free Cash Flow to Firm (FCFF) using the formulae for FCFF, for each of the
projected years
FCFF calculated as EBIT X (1 Tax Rate)

+ Depreciation Increase in Working
Capital Capex and Increase in WIP
We then calculate the Cost of Equity using CAPM and the post-tax Cost of Debt
Using the cost of equity, post-tax cost of debt and the target capital structure ratio, we calculate the
Weighted Average Cost of Capital (WACC) of the company, for discounting the FCFF
Cost of Equity is calculated using the
CAPM formula : Cost of Equity = Risk free
rate + Beta X Market Risk Premium
WACC = % Debt in the Capital X

Post-tax Cost of Debt + % Equity
in the Capital X Cost of Equity
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Using Free Cash Flow to Firm (FCFF) to arrive at Enterprise Value

The Terminal Value is calculated assuming a terminal growth on last projected FCFF and
computed WACC
Terminal Value = FCFF in FY14P X
(1 + Terminal Growth Rate) / (WACC
Terminal Growth Rate)
We then calculate the Discount Factors for each of the projected years using the WACC
Then, we calculate the present value of each projected years FCFF and the terminal value using
the corresponding years discount factors
We add up the present value of projected FCFF and terminal value to arrive at the Enterprise
Value, from which we can calculate the Equity Value, deducting the current net debt amount
Discount Factor for

Year N = 1 / (1 +
WACC) ^ N
Present Value of FCFF in year N
= Estimated FCFF in year N X
Discounted Factor in year N
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Relative Valuation Technique

We calculate the industry trading multiples from the trading comparables table
All the EV and Mcap numbers are in Rs Lakhs

We can then multiply the median of industry forward multiples with corresponding projected P&L line
item of the Company to arrive at the enterprise value or the market capitalization of the company
Median of Industry FY10E EV / Sales Multiples X Company FY10E Sales = Enterprise Value
Median of Industry FY11E EV / EBITDA Multiples X Company FY11E EBITDA = Enterprise
Value
Median of Industry FY10E P / E Multiples X Company FY10E PAT = Market Value of Equity
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We can similarly calculate the industry transaction multiples from the transaction comps table
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During the multiplication, we should look at the multiple and understand what it should get multiplied
with, and what would be the net product
Median of Industry FY10E EV / Sales Multiples X Company FY10E Sales = Enterprise Value
Median of Industry FY10E P / E Multiples X Company FY10E PAT = Market Value of Equity
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Creating a Football Field

We create a football field which shows the valuation range as per various methodologies (both
relative and absolute valuation techniques)
This gives a quick visual snapshot of range of values as per various valuation techniques
DCF Value
11.9
P/E (x) Multiple
14.1
10.6
EV/ EBITDA (x) Multiple
22.9
EV/ Sales (x) Multiple
14.2
-
5.0
10.0
24.9
15.1
15.0
20.0
25.0
30.0
Share Price (INR)
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Scenario Analysis on the Share Price Value

We can create scenario analysis on the share price value for various assumptions of WACC and
terminal growth rates
For that, we have to link the share price value from the valuation sheet to the cell in top left hand
corner of the scenario table
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Scenario Analysis on the Share Price Value

We select the entire area of the table including the cell containing the formula, and the rows and
columns containing the hard coded numbers for different scenarios and press [ALT + D + T]
In row input cell, we link the cell containing assumption for terminal growth rate
In column input cell, we link the cell containing the WACC value
We finally have the output scenario

analysis table as shown in here
WACC
81
11.9
10%
11%
12%
13%
14%
3%
10.3
8.9
7.8
6.9
6.2
Terminal Growth Rate

4%
5%
6%
11.7
13.8
16.8
9.9
11.3
13.3
8.6
9.6
10.9
7.5
8.3
9.2
6.7
7.2
8.0
7%
21.8
16.2
12.8
10.5
8.9
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Thank You

Financial Modeling Valuation

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Financial Modeling Valuation

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Financial Modeling in Excel

Introduction and context

Neev Knowledge Management Pristine

CFA Institute (2010-11)

FPSB India (2010-11)

Ernst & Young (2010)

ING Vyasa (2010)

Credit-Suisse India (2009)

NUS Business School (2011)

IIT Delhi (2009)

IIM Calcutta (2010-11)

FMS Delhi (2010-11)

Financial Modeling in Excel

Financial Modeling in Excel

BITS Pilani (2009)

IEMR Delhi (2010-11)

Financial Modeling in Excel

Final Year MBA students of

Excel as the most important tool for modeling

Functions and a range of features

Understand the industry models being used

Neev Knowledge Management Pristine

Decision Making based on Financial Analysis

Analysis and Decision Making

Neev Knowledge Management Pristine

Business reflected in the Statements

Neev Knowledge Management Pristine

Introduction and context

Neev Knowledge Management Pristine

What is an integrated model?

Neev Knowledge Management Pristine

What is involved in creating an integrated model??

Logically breaking your sheets

Formulas & Linking numbers

Neev Knowledge Management Pristine

Conditional formatting, circular

Effective modeling involves an indepth understanding of

How is an integrated model created?

Neev Knowledge Management Pristine

Integrated financial model A Schematic Flow Diagram

Neev Knowledge Management Pristine

Key aspects of Modeling & Excel Usage

It should generate the correct results

SPEED is the key in modeling

Neev Knowledge Management Pristine

Introduction and context

Neev Knowledge Management Pristine

Lets take a moment to understand components of Excel

Excel 2007 Interface

Neev Knowledge Management Pristine

Basic Editing and Saving Excel

Move to new cells

Change all Inputs to Blue:

What happens when you copy paste cells

Change the referencing of a cell by F2 + F4

Introduction and context

Neev Knowledge Management Pristine

Creating the template for financial modeling

Tower Model within sheet

Larger column width to put in the names and text

Matrix integrity to be maintained across multiple

Neev Knowledge Management Pristine

Ending Asset = {(Days of Asset)(Sales in the year/ 365)2} - Beginning Asset