Podcast
Questions and Answers
Which of the following is NOT an attribute of a good financial model?
Which of the following is NOT an attribute of a good financial model?
- Evaluate Risks through sensitivity analysis
- Clearly convey assumptions and conclusions
- Be extremely complex (correct)
- Focus on key cash flow drivers
A corporate model includes a terminal value assumption.
A corporate model includes a terminal value assumption.
True (A)
What are the primary focus areas of project finance models?
What are the primary focus areas of project finance models?
Cash flows and defined lifetime of the project
Which model type computes earnings per share and financial ratios before and after an acquisition?
Which model type computes earnings per share and financial ratios before and after an acquisition?
A good financial model allows decision makers to focus on appropriate ______.
A good financial model allows decision makers to focus on appropriate ______.
What is an aspect that must be included in leveraged buyout models?
What is an aspect that must be included in leveraged buyout models?
Which of the following statements is true regarding the structure of alternative models?
Which of the following statements is true regarding the structure of alternative models?
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Study Notes
Financial Modeling Objectives
- Build a well-structured financial model that clearly presents inputs, key value drivers, and cash flow computations for different debt and equity investors
- Present accurate analysis results that display investment risks
Financial Modeling Outline
- Structure and layout of alternative models: Corporate, Project Finance, LBO, and M&A Integration
- Model structure, programming practices, and model periods: Organization of time periods, value drivers, and inputs
- Modules: Debt, Fixed asset, Depreciation and Amortization
- Financial Statements: Income Statement, Cash Flow, Balance Sheet
- Valuation Outputs and Analysis: Presentation of key outputs, sensitivity analysis, and scenario analysis
Financial Models Attributes
- Simplicity
- Emphasis on key cash flow drivers
- Clear communication of assumptions and conclusions
- Risk evaluation using sensitivity analysis, break-even analysis, and scenario analysis
Alternative Model Types
- Corporate Model: Focuses on historic analysis and incorporates a terminal value assumption as cash flows are not projected indefinitely
- Project Finance Model: Concentrates on cash flows and covers the entire defined lifetime of a project, considering different phases and the lack of historical data
- Leveraged Buyout Model: Defined by an entry price, holding period, and exit price, focusing on financing sources, repayment, and return on equity
- M&A Integration Model: Computes earnings per share and financial ratios before and after an acquisition, factoring in financing, accounting, and cost savings
Valuation Analysis in Alternative Models
- Corporate Model: Present value of discounted free cash flow or multiples, weighted average cost of capital, and risk measurement
- Project Finance Model: Investment decision and implied value, equity IRR versus market hurdle rate
- LBO Model: Entry multiple and acquisition premium, IRR and hurdle rate
- M&A Integration Model: Acquisition premium, earnings per share accretion, debt ratios, sources of funds, senior and subordinated debt
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