A

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39

SETTING UP THE FINANCIAL STATEMENT MODEL

Sales growth
Current assets/Sales
Current liabilities/Sales
Net fixed assets/Sales
Costs of goods sold/Sales
Depreciation rate
Interest rate on debt
Interest paid on cash and marketable securities
Tax rate
Dividend payout ratio
Year
Income statement
Sales
Costs of goods sold
Interest payments on debt
Interest earned on cash and marketable securities
Depreciation
Profit before tax
Taxes
Profit after tax
Dividends
Retained earnings

10%
15%
8%
77%
50%
10%
10.00%
8.00%
40%
40%
0

1,000
(500)
(32)
6
(100)
374
(150)
225
(90)
135

1,100
(550)
(32)
9
(117)
410
(164)
246
(98)
148

<-- =B15*(1+$B$2)
<-- =-C15*$B$6
<-- =-$B$8*(B36+C36)/2
<-- =$B$9*(B27+C27)/2
<-- =-$B$7*(C30+B30)/2
<-- =SUM(C15:C19)
<-- =-C20*$B$10
<-- =C21+C20
<-- =-$B$11*C22
<-- =C23+C22

Balance sheet
Cash and marketable securities
Current assets
Fixed assets
At cost
Depreciation
Net fixed assets
Total assets

80
150

144
165

<-- =C39-C28-C32
<-- =C15*$B$3

1,070
(300)
770
1,000

1,264
(417)
847
1,156

<-- =C32-C31
<-- =B31+C19
<-- =C15*$B$5
<-- =C32+C28+C27

Current liabilities
Debt
Stock
Accumulated retained earnings
Total liabilities and equity

80
320
450
150
1,000

88
320
450
298
1,156

<-- =C15*$B$4
<-- =B36
<-- =B37
<-- =B38+C24
<-- =SUM(C35:C38)

E
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39

A
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50

FIRST FINANCIAL MODEL

Sales growth
Current assets/Sales
Current liabilities/Sales
Net fixed assets/Sales
Costs of goods sold/Sales
Depreciation rate
Interest rate on debt
Interest paid on cash and marketable securities
Tax rate
Dividend payout ratio
Year
Income statement
Sales
Costs of goods sold
Interest payments on debt
Interest earned on cash and marketable securities
Depreciation
Profit before tax
Taxes
Profit after tax
Dividends
Retained earnings

10%
15%
8%
77%
50%
10%
10.00%
8.00%
40%
40%
0

1,000
(500)
(32)
6
(100)
374
(150)
225
(90)
135

1,100
(550)
(32)
9
(117)
410
(164)
246
(98)
148

1,210
(605)
(32)
14
(137)
450
(180)
270
(108)
162

1,331
(666)
(32)
20
(161)
492
(197)
295
(118)
177

Balance sheet
Cash and marketable securities
Current assets
Fixed assets
At cost
Depreciation
Net fixed assets
Total assets

80
150

144
165

213
182

289
200

1,070
(300)
770
1,000

1,264
(417)
847
1,156

1,486
(554)
932
1,326

1,740
(715)
1,025
1,513

Current liabilities
Debt
Stock
Accumulated retained earnings
Total liabilities and equity

80
320
450
150
1,000

88
320
450
298
1,156

97
320
450
460
1,326

106
320
450
637
1,513

Year
0
Free cash flow calculation
Profit after tax
Add back depreciation
Subtract increase in current assets
Add back increase in current liabilities
Subtract increase in fixed assets at cost
Add back after-tax interest on debt
Subtract after-tax interest on cash and+A14 mkt. securities

246
117
(15)
8
(194)
19
(5)

270
137
(17)
9
(222)
19
(9)

295
161
(18)
10
(254)
19
(12)

A
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75

Free cash flow

C
176

D
188

E
201

CONSOLIDATED STATEMENT OF CASH FLOWS: RECONCILING THE CASH B

Cash flow from operating activities
Profit after tax
Add back depreciation
Adjust for changes in net working capital:
Subtract increase in current assets
Add back increase in current liabilities
Net cash from operating activities

246
117

270
137

295
161

(15)
8
356

(17)
9
400

(18)
10
448

(194)
0
0
(194)

(222)
0
0
(222)

(254)
0
0
(254)

Cash flow from financing activities

Net proceeds from borrowing activities
Net proceeds from stock issues, repurchases
Dividends paid
Net cash from financing activities

0
0
(98)
(98)

0
0
(108)
(108)

0
0
(118)
(118)

Net increase in cash and cash equivalents

Check: changes in cash and mkt. securities

64
64

70
70

76
76

Cash flow from investing activities

Aquisitions of fixed assets--capital expenditures
Purchases of investment securities
Proceeds from sales of investment securities
Net cash used in investing activities

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50

1,464
(732)
(32)
26
(189)
538
(215)
323
(129)
194

1,611
(805)
(32)
33
(220)
587
(235)
352
(141)
211

371
220

459
242

<-- =F15*(1+$B$2)
<-- =-G15*$B$6
<-- =-$B$8*(F36+G36)/2
<-- =$B$9*(F27+G27)/2
<-- =-$B$7*(G30+F30)/2
<-- =SUM(G15:G19)
<-- =-G20*$B$10
<-- =G21+G20
<-- =-$B$11*G22
<-- =G23+G22

<-- =G39-G28-G32
<-- =G15*$B$3

2,031
(904)
1,127
1,718

2,364
(1,124)
1,240
1,941

<-- =G32-G31
<-- =F31+G19
<-- =G15*$B$5
<-- =G32+G28+G27

117
320
450
830
1,718

129
320
450
1,042
1,941

<-- =G15*$B$4
<-- =F36
<-- =F37
<-- =F38+G24
<-- =SUM(G35:G38)

323
189
(20)
11
(291)
19
(16)

352
220
(22)
12
(333)
19
(20)

<-- =G22
<-- =-G19
<-- =-(G28-F28)
<-- =G35-F35
<-- =-(G30-F30)
<-- =-(1-$B$10)*G17
<-- =-(1-$B$10)*G18

F
51
52
RECONCILING
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75

214

G
228

H
<-- =SUM(G44:G50)

THE CASH BALANCES

323
189

352
220

<-- =G22
<-- =-G19

(20)
11
502

(22) <-- =-(G28-F28)

12 <-- =G35-F35
562 <-- =SUM(G55:G59)

(291)
0
0
(291)

(333)
0
0
(333)

<-- =-(G30-F30)
<-- Not in our model
<-- Not in our model
<-- =SUM(G63:G65)

0
0
(129)
(129)

0
0
(141)
(141)

<-- =G36-F36
<-- =G37-F37
<-- =G23
<-- =SUM(G69:G71)

82
82

88
88

<-- =G72+G66+G60
<-- =G27-F27

53
54
55
56
57
58
59
60
61
62
63
64
65
66
67

10%
15%
8%
77%
50%
10%
10.00%
8.00%
40%
40%

Year
Income statement
Sales
Costs of goods sold
Interest payments on debt
Interest earned on cash and marketable securities
Depreciation
Profit before tax
Taxes
Profit after tax
Dividends
Retained earnings

1,000
(500)
(32)
6
(100)
374
(150)
225
(90)
135

Balance sheet
Cash and marketable securities
Current assets
Fixed assets
At cost
Depreciation
Net fixed assets
Total assets

80
150

144
165

213
182

289
200

371
220

1,070
(300)
770
1,000

1,264
(417)
847
1,156

1,486
(554)
932
1,326

1,740
(715)
1,025
1,513

2,031
(904)
1,127
1,718

2,364
(1,124)
1,240
1,941

Current liabilities
Debt
Stock
Accumulated retained earnings
Total liabilities and equity

80
320
450
150
1,000

88
320
450
298
1,156

97
320
450
460
1,326

106
320
450
637
1,513

117
320
450
830
1,718

129
320
450
1,042
1,941

Year
Free cash flow calculation
Profit after tax
Add back depreciation
Subtract increase in current assets
Add back increase in current liabilities
Subtract increase in fixed assets at cost
Add back after-tax interest on debt
Subtract after-tax interest on cash and mkt. securities
Free cash flow

1,100
(550)
(32)
9
(117)
410
(164)
246
(98)
148

1,210
(605)
(32)
14
(137)
450
(180)
270
(108)
162

1,331
(666)
(32)
20
(161)
492
(197)
295
(118)
177

1,464
(732)
(32)
26
(189)
538
(215)
323
(129)
194

1,611
(805)
(32)
33
(220)
587
(235)
352
(141)
211

459
242

246
117
(15)
8
(194)
19
(5)
176

270
137
(17)
9
(222)
19
(9)
188

295
161
(18)
10
(254)
19
(12)
201

323
189
(20)
11
(291)
19
(16)
214

352
220
(22)
12
(333)
19
(20)
228

Valuing the firm

Weighted average cost of capital
Long-term free cash flow growth rate

20%
5% <-- real growth 2% + inflation 3%?

Year
FCF
Terminal value
Total

Enterprise value, present value of row 60

Add in initial (year 0) cash and mkt. securities
Asset value in year 0
Subtract out value of firm's debt today
Equity value

1,231
80
1,311
(320)
991

68 Cash and marketable securities

69 NPV of row 60 = enterprise value
70 Net year 0 debt: debt minus cash
71 Equity value
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
115
116
117
118
119

FIRST FINANCIAL MODEL

Sales growth
Current assets/Sales
Current liabilities/Sales
Net fixed assets/Sales
Costs of goods sold/Sales
Depreciation rate
Interest rate on debt
Interest paid on cash and marketable securities
Tax rate
Dividend payout ratio

1
176

2
188

3
201

4
214

176

188

201

214

228
1,598 <-- =G58*(1+B55)/(B54-B55)
1,826

<-- =NPV(B54,C60:G60)
<-- =B27
<-- =B63+B62
<-- =-B36
<-- =B64+B65

as negative debt
1,231 <-- =B62
(240) <-- =-B36+B27
991 <-- =B69+B70

Valuing the firm--using mid-year discounting

Weighted average cost of capital
Long-term free cash flow growth rate

20%
5%

Year
FCF
Terminal value
Total

Enterprise value, NPV of row 81

Add in initial (year 0) cash and mkt. securities
Asset value in year 0
Subtract out value of firm's debt today
Equity value

1,348
80
1,428
(320)
1,108

1
176

2
188

3
201

4
214

176

188

201

214

5
228
1,598 <-- =G79*(1+B76)/(B75-B76)
1,826

<-- =NPV(B75,C81:G81)*(1+B75)^0.5
<-- =B27
<-- =B84+B83
<-- =B65
<-- =B85+B86

Data table: The effect of sales growth (cell B2) on equity valuation
Growth
0%
2%
4%
6%
8%
10%
12%
14%
16%

1,108 <-- =B87 , data table header

1,093
Sales Growth and Equity Value
1,120
1,105
1,110
1,113
1,117
1,100
1,115
1,090
1,108
1,080
1,095
1,070
1,076
1,060
1,049
Equity value

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52

1,050
1,040

0%

2%

4%

6%

8%

10%

12%

14%

16%

Sales growth

=IF(B75<=B76,"nmf",B87)

Long-term FCF growth rate -->

1,108.37
0%
2%
4%
6%
8%
10%
12%
14%
16%

WACC
10%
2,038.12
2,447.00
3,128.45
4,491.36
8,580.08
nmf
nmf
nmf
nmf

12%
1,660.04
1,915.96
2,299.84
2,939.65
4,219.26
8,058.09
nmf
nmf
nmf

14%
1,390.52
1,562.34
1,802.89
2,163.72
2,765.09
3,967.84
7,576.07
nmf
nmf

16%
1,188.82
1,310.08
1,471.75
1,698.09
2,037.61
2,603.47
3,735.18
7,130.34
nmf

Note: Data tables are discussed in Chapter 31.

18%
1,032.29
1,121.12
1,235.34
1,387.62
1,600.82
1,920.62
2,453.61
3,519.60
6,717.58

20%
907.35
974.36
1,058.12
1,165.81
1,309.39
1,510.41
1,811.94
2,314.48
3,319.58

22%
805.37
857.11
920.35
999.40
1,101.03
1,236.55
1,426.27
1,710.85
2,185.15

24%
720.58
761.31
810.19
869.93
944.61
1,040.62
1,168.64
1,347.86
1,616.70

26%
649.00
681.59
720.10
766.32
822.81
893.42
984.20
1,105.25
1,274.71

A
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50

NEGATIVE CASH BALANCES: ILLUSTRATION

Sales growth
Current assets/Sales
Current liabilities/Sales
Net fixed assets/Sales
Costs of goods sold/Sales
Depreciation rate
Interest rate on debt
Interest paid on cash and marketable securities
Tax rate
Dividend payout ratio
Year
Income statement
Sales
Costs of goods sold
Interest payments on debt
Interest earned on cash and marketable securities
Depreciation
Profit before tax
Taxes
Profit after tax
Dividends
Retained earnings

20%
20%
8%
80%
50%
10%
10.00%
8.00%
40%
50%

<-- Increased from 10%

<-- Increased from 15%
<-- Increased from 77%

<-- Increased from 40%

1,000
(500)
(40)
6
(100)
366
(147)
220
(110)
110

1,200
(600)
(40)
4
(124)
440
(176)
264
(132)
132

1,440
(720)
(40)
(0)
(156)
524
(210)
314
(157)
157

1,728
(864)
(40)
(6)
(194)
624
(249)
374
(187)
187

(36)
288

(113)
346

Balance sheet
Cash and marketable securities
Current assets
Fixed assets
At cost
Depreciation
Net fixed assets
Total assets

80
200

28
240

1,100
(300)
800
1,080

1,384
(424)
960
1,228

1,732
(580)
1,152
1,404

2,157
(774)
1,382
1,615

Current liabilities
Debt
Stock
Accumulated retained earnings
Total liabilities and equity

80
400
450
150
1,080

96
400
450
282
1,228

115
400
450
439
1,404

138
400
450
626
1,615

Year
Free cash flow calculation
Profit after tax
Add back depreciation
Subtract increase in current assets
Add back increase in current liabilities
Subtract increase in fixed assets at cost
Add back after-tax interest on debt
Subtract after-tax interest on cash and mkt. securities
Free cash flow

264
124
(40)
16
(284)
24
(3)
101

314
156
(48)
19
(348)
24
0
118

374
194
(58)
23
(425)
24
4
137

TRATION

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50

2,074
(1,037)
(40)
(13)
(242)
742
(297)
445
(223)
223

2,488
(1,244)
(40)
(21)
(299)
884
(354)
530
(265)
265

(209)
415

(325)
498

2,675
(1,016)
1,659
1,865

3,306
(1,315)
1,991
2,163

166
400
450
849
1,865

199
400
450
1,114
2,163

445
242
(69)
28
(518)
24
8
159

530
299
(83)
33
(631)
24
13
186

A
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50

NO NEGATIVE CASH BALANCES

Sales growth
Current assets/Sales
Current liabilities/Sales
Net fixed assets/Sales
Costs of goods sold/Sales
Depreciation rate
Interest rate on debt
Interest paid on cash and marketable securities
Tax rate
Dividend payout ratio
Year
Income statement
Sales
Costs of goods sold
Interest payments on debt
Interest earned on cash and marketable securities
Depreciation
Profit before tax
Taxes
Profit after tax
Dividends
Retained earnings

20%
20%
8%
80%
50%
10%
10.00%
8.00%
40%
50%

<-- Increased from 10%

<-- Increased from 15%
<-- Increased from 77%

<-- Increased from 40%

1,000
(500)
(40)
6
(100)
366
(147)
220
(110)
110

1,200
(600)
(40)
4
(124)
440
(176)
264
(132)
132

1,440
(720)
(42)
1
(156)
524
(209)
314
(157)
157

1,728
(864)
(47)
(194)
622
(249)
373
(187)
187

0
288

0
346

Balance sheet
Cash and marketable securities
Current assets
Fixed assets
At cost
Depreciation
Net fixed assets
Total assets

80
200

28
240

1,100
(300)
800
1,080

1,384
(424)
960
1,228

1,732
(580)
1,152
1,440

2,157
(774)
1,382
1,728

Current liabilities
Debt
Stock
Accumulated retained earnings
Total liabilities and equity

80
400
450
150
1,080

96
400
450
282
1,228

115
436
450
439
1,440

138
514
450
626
1,728

Year
Free cash flow calculation
Profit after tax
Add back depreciation
Subtract increase in current assets
Add back increase in current liabilities
Subtract increase in fixed assets at cost
Add back after-tax interest on debt
Subtract after-tax interest on cash and mkt. securities
Free cash flow

264
124
(40)
16
(284)
24
(3)
101

314
156
(48)
19
(348)
25
(1)
118

373
194
(58)
23
(425)
28
0
137

ASH BALANCES
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50

2,074
(1,037)
(56)
(242)
739
(296)
443
(222)
222

2,488
(1,244)
(67)
(299)
878
(351)
527
(263)
263

0
415

0 <-- =G39-G28-G32
498

2,675
(1,016)
1,659
2,074

3,306
(1,315)
1,991
2,488

166
610
450
847
2,074

199
728
450
1,111
2,488

443
242
(69)
28
(518)
34
0
159

527
299
(83)
33
(631)
40
0
186

<-- =MAX(G28+G32-G35-G37-G38,F36)

TARGET DEBT-EQUITY RATIO

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49

Cash is fixed, ratio of debt/equity changes in each year

Sales growth
Current assets/Sales
Current liabilities/Sales
Net fixed assets/Sales
Costs of goods sold/Sales
Depreciation rate
Interest rate on debt
Interest paid on cash & marketable securities
Tax rate
Dividend payout ratio
Year
Income statement
Sales
Costs of goods sold
Interest payments on debt
Interest earned on cash & marketable securities
Depreciation
Profit before tax
Taxes
Profit after tax
Dividends
Retained earnings

10%
15%
8%
77%
50%
10%
10.00%
8.00%
40%
60%
0

1,000
(500)
(32)
6
(100)
374
(150)
225
(135)
90

1,100
(550)
(30)
6
(117)
409
(164)
246
(147)
98

1,210
(605)
(29)
6
(137)
445
(178)
267
(160)
107

1,331
(666)
(28)
6
(161)
483
(193)
290
(174)
116

Balance sheet
Cash and marketable securities
Current assets
Fixed assets
At cost
Depreciation
Net fixed assets
Total assets

80
150

80
165

80
182

80
200

1,070
(300)
770
1,000

1,264
(417)
847
1,092

1,486
(554)
932
1,193

1,740
(715)
1,025
1,305

Current liabilities
Debt
Stock
Initial (year 0)
Accumulated retained earnings debt/equity ratio:
Total liabilities and equity
=B36/(B37+B38)

80
320
450
150
1,000

88
287
469
248
1,092

97
284
457
355
1,193

106
276
451
471
1,305

Target debt-equity ratio

Year
Free cash flow calculation
Profit after tax
Add back depreciation
Subtract increase in current assets
Add back increase in current liabilities
Subtract increase in fixed assets at cost

0.53
0

0.40
1
246
117
(15)
8
(194)

0.35
2
267
137
(17)
9
(222)

0.30
3
290
161
(18)
10
(254)

A
50 Add back after-tax interest on debt
51 Subtract after-tax interest on cash & mkt. securities
52 Free cash flow

C
18
(4)
176

D
17
(4)
188

E
17
(4)
201

TY RATIO

hanges in each
year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49

1,464
(732)
(29)
6
(189)
521
(208)
313
(188)
125

1,611
(805)
(32)
6
(220)
560
(224)
336
(202)
134

80
220

80
242

2,031
(904)
1,127
1,427
117
302
412
596
1,427

2,364
(1,124)
1,240
1,562
129
331 <-- =G41*(G37+G38)
372 <-- =G33-G35-G36-G38
730
1,562

0.30
4
313
189
(20)
11
(291)

0.30
5
336
220
(22)
12
(333)

F
50
51
52

G
17
(4)
214

19
(4)
228

PROJECT FINANCE
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48

No dividends, debt repayment schedule fixed, net fixed assets consta

Sales growth
Current assets/Sales
Current liabilities/Sales
Costs of goods sold/Sales
Depreciation rate
Interest rate on debt
Interest paid on cash and marketable securities
Tax rate
Dividend payout ratio
Year
Income statement
Sales
Costs of goods sold
Interest payments on debt
Interest earned on cash and marketable securities
Depreciation
Profit before tax
Taxes
Profit after tax
Dividends
Retained earnings

15%
15%
8%
45%
10%
10.00%
8.00%
40%
0% <-- No dividends until all the debt is paid off
0

1,150
(518)
(90)
1
(211)
333
(133)
200
0
200

1,323
(595)
(70)
3
(233)
428
(171)
257
0
257

1,521
(684)
(50)
9
(257)
539
(216)
323
0
323

19
173

64
198

173
228

Balance sheet
Cash and marketable securities
Current assets
Fixed assets
At cost
Depreciation
Net fixed assets
Total assets

2,000
0
2,000
2,200

2,211
(211)
2,000
2,192

2,443
(443)
2,000
2,262

2,700
(700)
2,000
2,401

Current liabilities
Debt
Stock
Accumulated retained earnings
Total liabilities and equity

100
1,000
1,100
0
2,200

92
800
1,100
200
2,192

106
600
1,100
456
2,262

122
400
1,100
780
2,401

0
200

FREE CASH FLOW CALCULATION

Year
Profit after tax
Add back depreciation
Subtract increase in current assets
Add back increase in current liabilities
Subtract increase in fixed assets at cost
Add back after-tax interest on debt

200
211
28
(8)
(211)
54

257
233
(26)
14
(233)
42

323
257
(30)
16
(257)
30

70
71
72
73
74

A
Subtract after-tax interest on cash and mkt. securities
Free cash flow

RETURN ON EQUITY (ROE)

Year
Equity cash flow
RETURN ON EQUITY (ROE)

Data table: ROE as a function of initial

equity investment

C
(0)
273

(2)
285

0
1
2
-1,100
20.32% <-- =IRR(B59:G59)

2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200

(6)
334

3
-

20.32% <-- =B60&" , table header"

14.58%
15.43%
16.46%
17.73%
60%
19.34%
21.46%
40%
24.39%
28.73%
35.98%
51.54%

ROE

49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69

20%
0%
0

ANCE

ixed, net fixed

1 assets constant

2
3
4
5
6
7
8
9
until all the debt
10is paid off
11
12
4
13
14
1,749
15
(787)
16
(30)
17
21
18
(284)
19
669
20
(268)
21
401
22
0
23
401
24
25
26
359
27
262
28
29
2,985
30
(985)
31
2,000
32
2,621
33
34
140
35
200
36
1,100
37
1,181
38
2,621
39
40
41
42
4
43
401
44
284
45
(34)
46
18
47
(284)
48
18

5
2,011
(905)
(10)
40
(314)
822
(329)
493
0
493

633 <-- =G38-G27-G31

302
3,299
(1,299) <-- =F30-$B$6*(G29+F29)/2
2,000 <-- NFA don't change
2,935
161
0 <-- =F35-$B$35/5
1,100
1,674
2,935

5
493
314
(39)
21
(314)
6

Cash flow generated

by depreciation
equals capital
expenditures.

F
G
H
49
(13)
(24)
50
391
457
51
52
53
54
55
56
57
4
5
58
2,774 <-- =G23+G37+G38
59
60
61
B60&" , table header"
62
63
ROE as a Function of Initial
64
65
Equity Investment
66
67
68
69
70
71
72
73
74

500

1,000
1,500
Equity investment

2,000

PROJECT FINANCE
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48

With these parameters the project cannot pay off its debt
Sales growth
Current assets/Sales
Current liabilities/Sales
Costs of goods sold/Sales
Depreciation rate
Interest rate on debt
Interest paid on cash and marketable securities
Tax rate
Dividend payout ratio
Year
Income statement
Sales
Costs of goods sold
Interest payments on debt
Interest earned on cash and marketable securities
Depreciation
Profit before tax
Taxes
Profit after tax
Dividends
Retained earnings

15%
15%
8%
55%
10%
10.00%
8.00%
40%
0% <-- No dividends until all the debt is paid off
0

1,150
(633)
(90)
(2)
(211)
215
(86)
129
0
129

1,323
(727)
(70)
(6)
(233)
287
(115)
172
0
172

1,521
(836)
(50)
(7)
(257)
370
(148)
222
0
222

Balance sheet
Cash and marketable securities
Current assets
Fixed assets
At cost
Depreciation
Net fixed assets
Total assets

0
200

(52)
173

(92)
198

(83)
228

2,000
0
2,000
2,200

2,211
(211)
2,000
2,121

2,443
(443)
2,000
2,107

2,700
(700)
2,000
2,145

Current liabilities
Debt
Stock
Accumulated retained earnings
Total liabilities and equity

100
1,000
1,100
0
2,200

92
800
1,100
129
2,121

106
600
1,100
301
2,107

122
400
1,100
523
2,145

FREE CASH FLOW CALCULATION

Year
Profit after tax
Add back depreciation
Subtract increase in current assets
Add back increase in current liabilities
Subtract increase in fixed assets at cost
Add back after-tax interest on debt

129
211
28
(8)
(211)
90

172
233
(26)
14
(233)
70

222
257
(30)
16
(257)
50

70
71
72
73
74

A
B
Subtract after-tax interest on cash and mkt. securities
Free cash flow
Note that the cash flow generated by
depreciation equals the increase in fixed
assets at cost.

C
2
241

6
236

7
265

RETURN ON EQUITY (ROE)

Year
Equity cash flow
RETURN ON EQUITY (ROE)

Data table: ROE as a function of initial

equity investment

0
1
2
-1,100
15.44% <-- =IRR(B58:G58)

2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200

15.44% <-- =B60

11.40%
11.98%
12.70%
13.59%
14.73%
16.27%
18.42%

ROE

49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69

21.70%
27.37%
40.10%

3
-

60%
40%
20%
0%
0

ANCE
cannot pay1 off its debt

2
3
4
5
6
7
8
9
until all the debt
10is paid off
11
12
4
13
14
1,749
15
(962)
16
(30)
17
(4)
18
(284)
19
469
20
(187)
21
281
22
0
23
281
24
25
26
(18)
27
262
28
29
2,985
30
(985)
31
2,000
32
2,244
33
34
140
35
200
36
1,100
37
804
38
2,244
39
40
41
42
4
43
281
44
284
45
(34)
46
18
47
(284)
48
30

5
2,011
(1,106)
(10)
4
(314)
585
(234)
351
0
351

114 <-- =G38-G27-G31, the plug

302
3,299
(1,299)
2,000 <-- NFA don't change
2,416
161
0
1,100
1,155
2,416

5
351
314
(39)
21
(314)
10

F
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74

G
4
299

4
-

(4)
339

5
2,255 <-- =G22+G36+G37

ROE as a Function of Initial

Equity Investment

500
1,000
1,500
Equity investment ($)

2,000

PROJECT FINANCE
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49

With these parameters the project cannot pay off its debt
Sales growth
Current assets/Sales
Current liabilities/Sales
Costs of goods sold/Sales
Depreciation rate
Interest rate on debt
Interest paid on cash and marketable securities
Tax rate
Dividend payout ratio
Year
Income statement
Sales
Costs of goods sold
Interest payments on debt
Interest earned on cash and marketable securities
Depreciation
Profit before tax
Taxes
Profit after tax
Dividends
Retained earnings

15%
15%
8%
55%
10%
10.00%
8.00%
40%
0% <-- No dividends until all the debt is paid off
0

1,150
-633
-135
-7
-211
165
-66
99
0
99

1,323
-727
-105
-21
-233
236
-94
142
0
142

1,521
-836
-75
-33
-257
319
-128
191
0
191

Balance sheet
Cash and marketable securities
Current assets
Fixed assets
At cost
Depreciation
Net fixed assets
Total assets

0
200

-182
173

-352
198

-474
228

2,000
0
2,000
2,200

2,211
-211
2,000
1,991

2,443
-443
2,000
1,846

2,700
-700
2,000
1,754

Current liabilities
Debt
Stock
Accumulated retained earnings
Total liabilities and equity

100
1,500
600
0
2,200

92
1,200
600
99
1,991

106
900
600
240
1,846

122
600
600
432
1,754

FREE CASH FLOW CALCULATION

Year
Profit after tax
Add back depreciation
Subtract increase in current assets
Add back increase in current liabilities
Subtract increase in fixed assets at cost
Add back after-tax interest on debt
Subtract after-tax interest on cash and mkt. securities

99
211
28
(8)
(211)
135
7

142
233
(26)
14
(233)
105
21

191
257
(30)
16
(257)
75
33

A
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77

C
261

Free cash flow

D
256

E
286

Note that the cash flow generated by

depreciation equals the increase in fixed
assets at cost.

RETURN ON EQUITY (ROE)

Year
Equity cash flow
RETURN ON EQUITY (ROE)

Data table: ROE as a function of initial

equity investment

1
2
-600
21.70% <-- =IRR(B58:G58)

2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200

3
-

21.70% <-- =B59 , data table header

10.80%
11.43%
12.19%
13.14%
14.36%
15.98%
18.26%
21.70%
27.61%
40.76%
2,000

1,750

ANCE
cannot pay1 off its debt

2
3
4
5
6
7
8
9
until all the debt
10is paid off
11
12
4
13
14
1,749
15
-962
16
-45
17
-41
18
-284
19
417
20
-167
21
250
22
0
23
250
24
25
26
-540
27
262
28
29
2,985
30
-985
31
2,000
32
1,722
33
34
140
35
300
36
600
37
682
38
1,722
39
40
41
42
4
43
250
44
284
45
(34)
46
18
47
(284)
48
45
49
41

5
2,011
-1,106
-15
-43
-314
533
-213
320
0
320

-539 <-- =G38-G27-G31, the plug

302
3,299
-1,299
2,000 <-- NFA don't change
1,763
161
0 <-- =F35-$B$35/5
600
1,002
1,763

5
320
314
(39)
21
(314)
15
43

70
71
72
73
74
75
76
77

1,500

1,250

1,000

750

Equity investment

500

250

45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
0

ROE

F
G
H
50
320
359
51
52
53
54
55
56
57
4
5
58
1,602 <-- =G22+G36+G37
59
60
61
B59 , data table
62header
63
ROE as a Function of Initial Equity Investment
64
65
66
67
68
69

A
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74

COMPUTING THE ROE IN THE FIRST FINANCIAL MODEL

Sales growth
Current assets/Sales
Current liabilities/Sales
Net fixed assets/Sales
Costs of goods sold/Sales
Depreciation rate
Interest rate on debt
Interest paid on cash and marketable securities
Tax rate
Dividend payout ratio
Year
Income statement
Sales

10%
15%
8%
77%
50%
10%
10.00%
8.00%
40%
40%
0

1,000

1,100

1,210

1,331

Valuing the firm (mid-year discounting)

Weighted average cost of capital
Long-term free cash flow growth rate

20%
5%

Year
FCF
Terminal value
Total

Enterprise value, NPV of row 60

Add in initial (year 0) cash and mkt. securities
Asset value, year 0
Subtract out value of firm's debt today
Equity value

1,348
80
1,428
(320)
1,108

176

188

201

176

188

201

<-- =NPV(B54,C60:G60)*(1+B54)^0.5
<-- =B27
<-- =B63+B62
<-- =-B36
<-- =B64+B65

RETURN ON EQUITY (ROE)

Year
Projected dividends
Anticipated equity value, year 5
Equity cash flow
RETURN ON EQUITY (ROE)

0
(1,108)

2
98

3
108

118

(1,108)
98
108
18.29% <-- =IRR(B73:G73)

118

1,464

1,611

NCIAL MODEL
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
51
52

53
54
55
56
57
4
58
214
59
60
214
61
60:G60)*(1+B54)^0.5
62
63
64
65
66
67
68
69
70
4
71
129
72
73
129
74

5
228
1,598 <-- =G58*(1+B55)/(B54-B55)
1,826

5
141
1,737 <-- Terminal value + year 5 cash - year 5 debt
1,878 <-- =SUM(G71:G72)

A
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39

PROFIT AND LOSS WITH CARRYFORWARD

Year
Earnings before interest and taxes (EBIT)
Interest
Profit before tax
Loss carryforward
Taxable income
Taxes (30%)
Profit after tax

1
-100
-50
-150
0
-150
0
-150

2
400
-80
320
-150
170
-51
119

<-- =SUM(C3:C4)
<-- =IF(B9<0,B9,0)
<-- =SUM(C5:C6)
<-- =-MAX(0,0.3*C7)
<-- =C8+C7

Free Cash Flow (FCF) with No Debt

Year
Earnings before interest and taxes (EBIT)
Interest
Profit before tax
Loss carryforward
Taxable income
Taxes (30%)
Profit after tax
Add back tax-loss carryforward
Free cash flow (FCF)

2
-100
0
-100
0
-100
0
-100
0
-100

400
0
400
-100
300
-90
210
100
310

<-- =IF(B20<0,B20,0)
<-- =SUM(C16:C17)
<-- =-MAX(0,0.3*C18)
<-- =C19+C18
<-- =-C17
<-- =C21+C20

CALCULATING FCF FROM PROFIT AND LOSS STATEMENT

Year
Earnings before interest and taxes (EBIT)
Interest
Profit before tax
Loss carryforward
Taxable income
Taxes (30%)
Profit after tax
FCF Calculation
Profit after tax
Add back loss carryforward
Add back interest, net of tax
Subtract interest tax shield on carryforward
Free cash flow (FCF)

2
-100
-50
-150
0
-150
0
-150

400
-80
320
-150
170
-51
119

-150
0
50
0
-100

119
150
56
-15
310

<-- =C5
<-- =C6
<-- =C7
<-- =C8
<-- =C9

<-- =C32
<-- =-C29
<-- =-(1-0.3)*C27
<-- =0.3*B27
<-- =SUM(C35:C38)

A
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50

ACCELERATED DEPRECIATION
Sales growth
Current assets/Sales
Current liabilities/Sales
Net fixed assets/Sales
Costs of goods sold/Sales
Depreciation rate
Interest rate on debt
Interest paid on cash & marketable securities
Tax rate
Dividend payout ratio
Year
Income statement
Sales
Costs of goods sold
Interest payments on debt
Interest earned on cash & marketable securities
Depreciation
Profit before tax
Taxes
Profit after tax
Dividends
Retained earnings

10%
15%
8%
77%
50%
10%
10.00%
8.00%
40%
40%
0

1,000
(500)
(32)
6
(100)
374
(150)
225
(90)
135

1,100
(550)
(32)
6
(291)
233
(93)
140
(56)
84

1,210
(605)
(32)
6
(350)
229
(92)
138
(55)
83

1,331
(666)
(32)
5
(419)
219
(88)
132
(53)
79

80
150

80
165

70
182

47
200

Balance sheet
Cash and marketable securities
Current assets
Fixed assets
At cost
Depreciation
Net fixed assets
Total assets

2,674
(1,904)
770
1,000

3,155
(2,308)
847
1,092

3,838
(2,907)
932
1,183

4,536
(3,511)
1,025
1,272

Current liabilities
Debt
Stock
Accumulated retained earnings
Total liabilities and equity

80
320
450
150
1,000

88
320
450
234
1,092

97
320
450
316
1,183

106
320
450
395
1,272

Year
Free cash flow calculation
Profit after tax
Add back depreciation
Subtract increase in current assets
Add back increase in current liabilities
Subtract increase in fixed assets at cost
Add back after-tax interest on debt
Subtract after-tax interest on cash & mkt. securities

140
291
(15)
8
(481)
19
(4)

138
350
(17)
9
(683)
19
(4)

132
419
(18)
10
(698)
19
(3)

A
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99

Free cash flow

C
(42)

D
(188)

E
(139)

DEPRECIATION CALCULATION--year 0 assets assumed 3 years old

Sales growth
Net fixed assets/Sales
Sales
Year
Fixed assets at cost, end of year
Accumulated depreciation
Net fixed assets required, end of year

10%
77%
1,000

1,100

1,210

1,331

0
2,674
(1,904)
770

1
3,155
(2,308)
847

2
3,838
(2,907)
932

3
4,536
(3,511)
1,025

New assets acquired during year

481

683

Accumulated depreciation calculation

Accumulated depreciation, end of previous year
1,904
2,308
Depreciation of year 0 assets
308
308
Depreciation of assets acquired year 1
96
154
Depreciation of assets acquired year 2
137
Depreciation of assets acquired year
3
=VLOOKUP(3+C$59,$A$80:$B$85,2)*$B$60
Depreciation of assets acquired year 4
Depreciation of assets acquired year 5
Accumulated depreciation
1,904
2,308
2,907

698

2,907
154
92
219
140

3,511

=VLOOKUP(C$59,$A$80:$B$85,2)*$C$

Depreciation table--5-year asset life

Year
1
2
3
4
5
6
Average depreciation over 6 years
ALTERNATIVE: Assume straight line depreciation
Year
Assets in place, end of year
Accumulated depreciation
Net fixed assets required, end of year
Accumulated depreciation calculation
Accumulated Depreciation, end of previous year
Depreciation of average assets in year, 20%
Accumulated depreciation

Depr.
rate
20.00%
32.00%
19.20%
11.52%
11.52%
5.76%

=VLOOKUP(D$59

Cum.
depr.
20%
52%
71%
83%
94%
100%

16.67% <-- =AVERAGE(B80:B85)

0
2,674
(1,904)
770

1
3,244
(2,397)
847

2
3,926
(2,994)
932

3
4,741
(3,716)
1,025

1,904
493
2,397

2,397
597
2,994

2,994
722
3,716

A
100
101 Cash flow effect
102
Tax shield on accelerated depreciation
103
Tax shield on straight-line depreciation

162
197

239
239

242
289

CIATION

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50

1,464
(732)
(32)
2
(503)
200
(80)
120
(48)
72

1,611
(805)
(32)
(2)
(588)
184
(74)
110
(44)
66

7
220
5,516
(4,389)
1,127
1,354

(49) <-- =G39-G28-G32

242
6,239 <-- =G60
(4,999) <-- =G61
1,240 <-- =G62
1,432

117
320
450
467
1,354

129
320
450
533
1,432

120
503
(20)
11
(980)
19
(1)

110
588
(22)
12
(723)
19
1

<-- =F36
<-- =F38+G24

F
G
H
51
(349)
(15)
52
53
54
55
56
57
1,464
1,611
58
59
4
5
60
5,516
6,239 <-- =G62-G61
61
(4,389)
(4,999) <-- =-G74
62
1,127
1,240 <-- =$B$5*G57
63
64
980
723
65
66
67
3,511
4,389
68
154
154
69
55
55
70
131
79
71
223
134
72
314
188
73
231
74
4,389
4,999 <-- =SUM(G67:G72)
75
76
OOKUP(C$59,$A$80:$B$85,2)*$C$64
77
78
=VLOOKUP(D$59-1,$A$80:$B$85,2)*$D$64
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99

=VLOOKUP(E$59-2,$A$80:$B$85,2)*$E$64

4
5,715
(4,588)
1,127

5
6,877
(5,637)
1,240

3,716
871
4,588

4,588
1,049
5,637

F
100
101
102
103

351
349

337
420