Week Three CAFM

Advanced Modeling and Valuation
Project Finance and Manufacturing Companies

Outline Advanced Modeling and Valuation
You will learn to model the following:
• Pro forma financial statements

• Cash, Debt, or Equity as a ‘PLUG’
• Pro Forma Financial Statements with constraints on: financial leverages ratios,
debt repayments schedules, and dividend policy
• Free Cash Flows when there are negative profits
• Sensitivity Analysis and Data tables
• Case: “Cemento”, a company that is a manufacturer of cement bags located in
the Gulf.
Pro Forma Financial Statements

Almost all financial-statement models are sales driven.
This term assume that many of the balance-sheet and income-statement items
are directly or indirectly related to sales.
The mathematical structure of solving the models involves finding the solution to a
set of simultaneous linear equations predicting both the balance sheets and the
income statements for the coming years.
However, the user of a spreadsheet need never worry about the solution of the
model; the fact that spreadsheets can solve-by iteration-the financial relations of the
model means that we only have to worry about correctly stating the relevant
accounting relations in our Excel Model!

 Knowing that fixed assets have a certain capacity for the sales level, then you
should always bear in mind that:
Fixed Assets= X If sales < A

Fixed Assets= Y If A ≤sales < B
Etc..
 In order to solve a financial-planning model, we must distinguish between those

financial-statement items that are functional relationships of Sales and perhaps of
other financial-statement items and those items that involve policy decisions.

 Consider this simple example that we will work on advancing it in the
coming slides :
Given: A company XYZ has a current sales level of $1,000 (in Thousands). The
firm expects its sales to grow at a rate of 10% per year, and it anticipates the
following financial statement relations:
Current Assets 15% of end of year sales
Current Liabilities 8% of end-of-year sales
Net fixed Assets 77% of end-of year sales
Depreciation 10% of the average value of the
books during the year
Debt The firm will not repay nor will
borrow any more money over 5
years.
Cash and Marketable Securities We will consider this for now, the
balance sheet ‘PLUG’

Important Notes
The dollar signs ($) for fixing the columns and the rows of the input cells are very
important when forecasting!
 If you fail to put them in, the model will not copy correctly when you project years
2 and beyond.
The ‘PLUG’: Is the balance sheet item that will close the model:
-How do we guarantee that assets and liabilities are equal?

-How does the firm finance its incremental investments?
In General the ‘PLUG” in a pro forma model will be one of three financial balance-
sheet items: (1) Cash and Marketable Securities, (2) Debt, or (3) Stock.

Important Notes
 The mechanical meaning of the ‘PLUG’ if we decided that ‘PLUG’ is Cash and
Marketable Securities item in the balance sheet. Then,
Cash and Marketable Securities = Total Liabilities and Equity

- Current Assets
- Net fixed Assets
•By using this definition, we guarantee that assets and liabilities will be equal
Check example on Excel Spreadsheet


Income Statement Equations
 New level of sales= Initial Sales * (1+Sales growth) year
COGS=Sales*(COGS/Sales)
The assumption for now: That only expenses related to sales are
COGS (Yet, we will discover later an advanced case study where we will
model every major item and we’ll put our own logical assumption
Interest payments on debt=Interest rate on debt*Average debt over the year

This formula allows us to accommodate changes in the model for
repayment of debt, as well as rollover of debt at different interest rates.
Interest earned on cash and marketable securities = (Interest rate on cash *

Average cash and marketable securities over the year)

Income Statement Equations
 Depreciation Expense= (Depreciation rate * Average fixed assets at cost over

the year)
Profit before taxes = Sales – COGS - Interest payments on debt + Interest

earned on cash and marketable securities – Depreciation
Taxes = Tax rate * Profit before taxes
Profit after taxes = Profit before taxes – Taxes
Dividends = Dividend Payout ratio * Profit after taxes

In real life examples the firm might have a target dividend payout ratio, or
it might have a policy stating that the Dividend Payout ratio.
Retained Earnings = Profit after taxes - Dividends


Balance Sheet Equations
 Cash &Marketable Securities = Total liabilities and equity – Current Assets – Net
fixed Assets
Current Assets = (Current Assets/Sales)*Sales
Net Fixed Assets = (Net fixed assets/Sales)*Sales
You should make sure that the net fixed assets should not include LAND,
because land as a fixed asset should not be depreciated

Balance Sheet Equations
Current liabilities = (Current liabilities/Sales)*Sales
In the simple example in Excel we assumed that debt is not changing,

but later on ( especially in private equities-Leverage buyout) debt will
be the ‘PLUG’
Also, the simple example in Excel assumed stock doesn’t change

(i.e.: Shareholders provide no additional direct financing: the
company is assumed to issue no new stock or repurchase any
stock), yet in the coming advanced models (especially: UPS Case)
equity will be changing due to stock buyback policy set by the
management

Circular References in Excel

Financial Statement models in Excel always involve cells that are mutually
dependent. As a result the solution of the model depends on the ability of Excel to
solve circular references. To make sure your spreadsheet recalculates, you have to
go to the:
Microsoft Office Button |Excel Options |Formulas |Calculation Options

|Enable Iterative Calculation
Make sure in ‘Calculation Options’| Automatic button is clicked

Cash Flow Statement Modeling
Primary purpose:
To provide information about a company’s cash receipts
and cash payments during a period.
Secondary objective:
To provide cash-basis information about the company’s
operating, investing, and financing activities.
Usefulness of the Statement of Cash Flows

Provides information to help assess:
1. Entity’s ability to generate future cash flows.
2. Entity’s ability to pay dividends and obligations.
3. Reasons for difference between net income and net

cash flow from operating activities.
4. Cash and noncash investing and financing transactions.

Classification of Cash Flows

Operating Investing Financing
Activities Activities Activities
Income Changes in Changes in

Statement Investments and Long-Term
Transactions Long-Term Liabilities and
Asset Items Stockholders’
Equity
IFRS allows some flexibility regarding
the classification of certain items such as
interest, dividends, and taxes.
Classification of Typical
Cash Inflows and
Outflows
Classification of Typical
Cash Inflows and
Outflows
Cash and Cash Equivalents

The basis recommended by the IASB for the statement of
cash flows is actually “cash and cash equivalents.” Cash
equivalents are short-term, highly liquid investments that are
both:
 Readily convertible to known amounts of cash, and
 So near their maturity that they present insignificant risk of

changes in value (e.g., due to changes in interest rates).
Generally, only investments with original maturities of three months

or less qualify under this definition.
Format of the Statement of Cash Flows

Presentation:
1. Operating activities. Direct Method
2. Investing activities. Indirect Method
3. Financing activities.
Report inflows and outflows from investing and financing

activities separately.
Steps in Preparation
Three Sources of Information:
1. Comparative statements of financial position.
2. Current income statement.
3. Selected transaction data.
Three Major Steps:

Step 1. Determine change in cash.
Step 2. Determine net cash flow from operating activities.
Step 3. Determine net cash flows from investing and
financing activities.
Example
Step 2: Determine the Net Cash Flow from Operating
Activities Net Income versus Net Cash
Flow from Operating Activities
Net Cash Flow from Operating Activities—

Indirect Method
Adjustments Needed to Determine Net Cash Flow
Indirect Method from Operating Activities.
Some Notes on the Valuation Procedure

There are many ways used in the financial modeling industry to determine the terminal
value, We will state most used ones:
 Terminal value = Year-5 book value of debt + Equity

This calculation assumes that the book value correctly predicts the market value.
Terminal value = (Enterprise market/book multiple)*(Year-5 book value of debt +

Equity)
Terminal Value = P/E ratio*Year 5-profits + Year-5 book value of debt

Used extensively in private equity valuation (We’ll cover a private equity case later
on!)
Terminal value = EBITDA ratio or multiple*Year-5 anticipated EBITDA

EBITDA= Earnings before interest, taxes, depreciation, and amortization.
Also, used extensively in private equity valuation.

 If you are using the valuation technique using FCFF, most investment bankers
and equity analysts assume that initial cash balances are negative debt.
Meaning when valuing the firm and calculating the enterprise value, we usually
calculate the equity value by removing from the EV the debt account. Yet, it will
be more precisely (This approach will inflate the equity value) to remove cash
and marketable securities, since it is assumed that this amount can be used to
repay the debt outstanding.
 We would like also to note, that most companies have employee stock options
and preferred stock. The value of options (You can determine it using Black
Scholes calculator) and the value of preferred stocks should also be removed
from the enterprise value to determine the clean equity value.
 In addition, some firms have minority interests and the value of minority interests
should also be eliminated from enterprise value (EV), to arrive to the equity
value.

 Let’s make things crystal clear!
 If you are using FCFF to determine the enterprise value, then by discounting all
FCFFs projected to the present, you will arrive to the EV.
 Yet, we are concerned about the equity value! To do this you should subtract
from EV the following items:
1-Debt and Debt equivalents(Pension funds)- (Eliminate Cash and Marketable

Securities from Debt)
2-Value of Employee Stock Options
3-Value of preferred shares
4-Value of minority interests
Note: If you removed during your calculation of PV,FCFF the value of non-operating
assets (i.e.: investments in other assets, or value of cash & marketable
securities), then this should be added again to PV, FCFF to arrive to the EV.

 In brief, Let’s see how the EV and Equity Value equations will look like if we are
using FCFF as a valuation tool:
 When using FCFF your valuation method, don’t forget to discount using
WACC!
Illustration
Data Tables (Sensitivity Analysis)

Data table commands are powerful commands that make it possible to do complex
sensitivity analyses. Excel offers the opportunity to build a table in which only one
variable is changed, or one in which two variables are changed. Excel data tables are
array functions and thus change dynamically when related spreadsheet cells are
changed.
You can construct a sensitivity analysis by testing one or two variables how do they
affect the value of your outcome if those variables.
Follow the Instructor carefully to illustrate in details about the construction of data
tables and their purposes
DEBT as a ‘PLUG’
Having Cash and marketable securities as the ‘PLUG’ will be illogical if the Cash
and marketable securities account turn to be negative in any year!
In our previous model, if we try to change some of the given numbers slightly, we
can see that we will have such a case where Cash and Marketable Securities
account will turn to be negative.
Check example on Excel Spreadsheet
 We will use debt as our “PLUG’ with Cash and marketable securities
remaining also a ‘PLUG’ due to this reason, and for other reasons such
as:
1- Companies might have strict target debt/equity ratios
2- Companies might need additional financing, so it will borrow
money
How to Structure Debt as a ‘PLUG’ , with Cash and

Marketable Securities being also a ‘PLUG’?
1-Cash and marketable securities remains the plug in the model.
2- The debt on the balance sheet conforms to the following test:
Current assets + Net fixed assets > Current liabilities + Last year’s debt
+ stock + Accumulated retained earnings?
In this case even if cash and marketable securities are equal to 0, we need to
increase debt balances in order to finance the firm’s productive activities.
Current assets + Net fixed assets < Current liabilities + Last year’s debt+ Stock+ Accu. R.E ?
If this relation holds, then there is no need to increase debt, and, in fact, the firm has to have
positive cash and marketable securities as a balancing item, and the fact that we have made cash
the plug will take care of this concern
SOLUTION: MAX function in debt should be used

Target Debt/Equity Ratio into a Pro Forma

Another change we might want to make in our model relates to the ‘PLUG’, is to
incorporate the target debt/equity ratio.
Suppose that the firm has a target ratio of debt to equity: In each of the projected
years (1-5), it wants debt and equity on the balance sheet to conform to a certain
ratio
Be as much as dynamic as you can! Tie the debt level of year 2 with a separate
cell stating the target or expected debt-to-equity ratio in year 2. Tie the debt level of
year 3 with a different cell stating the target debt-to-equity ratio expected in year 3
etc…
Target Debt/Equity Ratio into a Pro Forma

Debt = Target debt/equity ratio*(Stock + Retained Earnings)
Stock = Total assets – Current Liabilities – Debt – Accumulated Retained

Earnings
As we can see from the example the firm issued new debt years 4 and 5; in year
1 the stock account grows (indicating that new equity is issued), whereas in
subsequent years stock decreases (including a repurchase of equity).
Project Finance
Project finance is only possible when the project is capable of producing enough
cash to cover all operating and debt-servicing expenses over the whole tenor of the
debt.
 A financial model is needed to assess economic feasibility of the project.

Model's output is also used in structuring of a project finance deal. Most importantly, it
is used to determine the maximum amount of debt the project company can have and
debt repayment profile.
The Debt Service Coverage Ratio (DSCR) is the major measuring ratio for a project
finance.
It should not exceed a predetermined level (In most cases it should be less than
1.60)
Special case, DSCR can be 1.15 for power plants with strong off-take agreements.
Project Finance
 It is perfect that we study project finance modeling, because project
finance include many restrictions and covenants.
In a typical case of Project finance, the firm borrows money in order to
finance a project
 The borrowing often comes with strings attached:
1-The firm is not allowed to pay any dividends until the debt is paid off.
2-The firm is not allowed to issue any new equity.
3-The firm must pay back the debt over a specified period.
Project Finance
Example: The following simplified example uses a variation of the version of our basic
model with cash balances. A new firm or project is set up; in year 0,
The firm has assets of 2,200, which are financed with 200 of current liabilities, 1,100
of equity, and 1,000 of debt.
The debt must be paid off in equal installments of principal over the next five years.
Until the debt is paid off, the firm is not allowed to pay dividends (if there is extra cash,
this will go into a cash and marketable securities account).
Note: The ROE in project finance is simply the IRR of the cash and equity inflows.
Simply your initial investment is the – ve equity flow and the ending value is: Ending
Accumulated RE + Capital Stock + Dividends+ ve equity flows ( If allowed to pay
dividends).
Real World Modeling Process – Corporate

Models
The following six step process:
• Step 1: Gather Historic Financial Statements and read them (it is not so
bad)
• Step 2: Change the Arrangement of Financial Statements (See the
example on the Excel Sheet of Cemento Inc, Case)
• Step 3: Compute Ratios from Historic Financial Statements to develop
some of the mechanical assumptions such as A/R to sales and
depreciation rate
• Step 4: Develop Revenue, Expense and Capital Expenditures by
Working through Value Drivers
• Step 5: Work through the Income Statement, then the Cash Flow
Statement, then the Balance Sheet to Check, only for forecasted years
• Step 6: Valuation, sensitivity analysis, and presentation
Use of History to Determine Drivers in

Corporate Modeling
• Translate value drivers such as price, the cost of new capacity and
cost structure to financial statement projections
• You often need minimal operating data – one measure of capacity
and one measure of sales
• Evaluate historical relationship between value drivers and financial
variables
– There is no generic formula for establishing value drivers
– Value drivers should incorporate some kind of capacity, capacity
utilization and cost structure assumptions
• Determine how the financial structure – the outstanding debt –
affects financial performance
Results of Arranging Inputs

• When you are finished arranging items:
– You should have an opening balance sheet
• Total non-cash current assets
• Total non-debt current liabilities
• Total fixed debt to be repaid
– You should have a debt schedule
• Aggregate of debt issues should tie to balance sheet
– You should have a history of revenues,
expenses and depreciation
• Use revenues and expenses and focus on drivers
• Use depreciation to determine the deprecation rate
Operating Assumptions in Model

Once the working sheet data has been developed
compute the three basic operating inputs:
– Capital expenditures
– Revenues
– Operating expenses
• When you get a model from someone else find

these three inputs and work backwards
• History should be presented along with forecasts
for the value drivers
Workings Analysis Issues

• Combine historic financial statement data with selected operational data
– The operational data is most difficult to find, but you do not need much
• For each line item in the financial statements, show ratios for the items and
show assumptions for the ratios
• The key is to isolate real economic drivers such as price, capacity

utilization, market share and other things that really drive value
• Arrange by Revenues, Expenses, Capital Expenditures, Working Capital

and Depreciation
• Compute change in working capital for the cash flow analysis

Relate Capacity to Demand

• Begin with demand and then express the demand in
terms of required capacity (See Cemento Inc, Case Study)
• Relate the capacity to demand
– Use a ratio of demand to capacity
• Reserve margin that relates demand to required capacity
• Class rooms needed at capacity
• Max towers per subscriber
• Retail outlets per level of sales
– Once you have the maximum capacity, test the capacity
against the level of sales.
– Use the roundup command in excel
Value Drivers and Starting Point of Forecast

• Demand Driven Forecast (Telecommunications)
– Begin with market size, industry demand and derive volumes
– Volume = Industry Demand x Market Share
– Capacity requirements come from volume and maximum utilization
– Drivers and Market Size, Market Penetration, Market Share and
Price
• Capacity Driven Forecast (Commodity Markets)
– Begin with capacity ( The ability of the market to absorb) instead of
demand and determine volumes from capacity utilization multiplied
by capacity
– Inputs driven by technical efficiency parameter
– New capacity driven by corporate strategy
– Drivers are capacity, capacity utilization, and price
Value Drivers and Starting Point of Forecast

• Asset Driven Forecast (Retail Banks, Investment
Companies)
– Begin with asset and liabilities

– In banks, use deposit growth and loan to deposit ratios
– Investments (like capital expenditures) are increases in
loans
Examples of Value Drivers

• Economic and business variables that directly affect cash generation:
– Price per unit sold
– Volumes sold
• Penetration rates in theme park
• Market share of telecommunications firm
• Sales per square foot
– Cost per ton
– Occupancy rates
– Cost of capacity per new subscriber
– Cost of replacing oil reserves per bbl
• Main drivers that should be utilized to prepare sensitivity analysis
• Correlation with macro-economic variables will be useful

Working Through Drivers

• Use revenue components from income statement
– Relate revenue components to available volume data
– Relate volume data to capacity data
• Example – Airline planes and passenger traffic related to passenger
revenues; number of planes is capacity; passenger miles is volume
• Use operating expense components from income statement
– Relate to same volume and capacity data as revenues
– Split into fixed and variable costs if possible
• Use corporate strategy for capital expenditures
– Determine cost of capital expenditures per capacity
– Split between maintenance capital expenditures (Most of the
times it is equal to depreciation) and expenditures for new
additions
What is Private Equity?

Definition: Private Equity is an asset class consisting of
equity and debt securities in companies that
are not publicly traded on a stock exchange.
However: in practice, the term “private equity” typically

refers to growth capital and buyout situations
as opposed to “venture capital” which typically
refers to early and later-stage VC funding
situations. The focus is predominantly on
equity investments.
Angel Early Later- Growth

Buyouts
Investing Stage VC Stage VC Capital
Young Mature
How PE funds are typically structured
Investor Fund Manager
Private equity investors Private equity funds are Private equity funds are
are known as limited special purpose vehicles managed by private equity
partners (LP) established for a limited firms which acts as
duration general partners (GP)
LP #1
LP #2
XYZ Advisors L.L.P.
Established as a limited
LP #3 liability company
.
.
.
Financial Modeling: why do private equity professionals build detailed financial models
when assessing a potential investment opportunity: seven key reasons to keep in mind
Portfolio Company
Entry Exit
Management
1. To build deep insights into 4. To set, at entry, management 7. To assess, before the time of
the likely growth prospects of incentives linked to the entry, what could be the
a company and its financial model. most likely exit route
requirements for funding, depending on the size and
both present and future. growth prospects of a
5. To benchmark over the company based on its
2. To put a value on a company course of the holding period projected performance at the
at entry whether on the basis a company’s actual tail end of the financial
of a DCF or comparable performance against its model.
multiples (using historical or financial plan.
forward-looking multiples).
3. To asses a target’s ability to 6. To assess management

borrow and repay any debt. performance and implement
changes if needed (fire, hire,
4. To put an exit value and etc.).
estimate the likely IRR range.

Your financial model should comprise of a number of tabs all

dynamically linked to each other
Repeating the Major Rules

1. A model should identify key industry and business drivers and model around them. These key business
and financial drivers should ultimately reconcile with a company’s overall vision and strategic actions.
2. Avoid modeling around potential drivers that represent averages in themselves. Break them down into
inputs and let the output represent the weighted average. This is one of the most significant modeling flaws
often leading to wrong outputs.
3. Try to understand how each driver is likely to behave during the forecast period, e.g., some costs (e.g.,
variable) will behave as a % of sales while others (e.g., fixed) are likely to move more along inflation.
4. Make sure your model has plenty of cross-checks to ensure that (1) assumptions make sense and (2) your
model is built properly.
5. A model should be dynamic, i.e., any change to any assumption cell should dynamically impact the full
model. Beware: there should be no manual adjustment whatsoever.
6. Ideally, every cell should represent either a single assumption input (A1 = 10) or a formulaic output linking
only cells together, i.e., A11 = A1+A10. This is particularly important to build dynamic models that are also
easy to audit.
• Assumption cells should not be composed of formulas, e.g, A1 = 10 x A3

• Output cells should also not, in most cases, be composed of formulas linking assumptions cells with
manual input, e.g., A11 = A1 X 12
Case Study
CEMENTO Inc,
This case was developed solely as the basis for CAFM® program and is not
intended to serve as an endorsement, source of primary date, or illustration of
effective or ineffective management.
Cemento is a cement manufacturing company in Kuwait. Cemento has two other

main competitors in Kuwait- National Cement Company (NCC) and National
Portland Cement Company (NPCC).
Cemento held a 15.3% share of cement consumption in Kuwait, excluding exports

to neighboring countries, namely Iraq.
The company recovered its full market share following the refurbishment of its
floating terminal in 2004 and the implementation of a new strategy aimed at
building market share and profitability commensurate with the company’s capacity
potential.
Case Study
Case Study
Case Study
Case Study
Case Study
Cemento used to sell three types of cement products:
1-Portland Cement
2- Sulfate Resisting Cement (SRC)
3- White Cement distributed in bulk and bags.
Bulk cement was sold principally to ready mix concrete companies and
construction contractors in cement silos.
In 2006, bulk and bag sales represented 86.8% and 13.2% of total sales
respectively, a mix typical of the industry; both NCC’s and NPCC’s bags sales
represented approximately 40% of total cement sales.
In the case of Cemento, lower bags sales were due to the company’s historical
emphasis on bulk sales.
Case Study
 In order to grow market share, the management were now trying to progressively
change this mix by putting more emphasis on cement bags. The management knew
they had little choice.
 Of all customer segments, sales to bags-customers as well as to Iraqi resellers

continued to offer Cemento the highest profitability.
 In 2006, cement bags sold in Kuwait were priced at an additional premium of

USD1.5 per ton relative to bulk prices; bags sold to Iraq were priced at even a
higher premium of USD3 per ton.
To take advantage of short term opportunities in Iraq, the management applied
and received government approval to sell 10% of its total imported cement volume
to Iraq.
Additional approvals would be needed for any further years as part of a

government policy to ensure that its own market was fully provided for.
Case Study
 In addition to selling cement, at the option of customers, Cemento provided on-

site deliveries. Income generated from on-site cement deliveries amounted to
approx. USD 145,000 in 2006 (Exhibit6).
Case Study
Cemento’s main procurement cost consisted of cement purchases, which
amounted to USD13.2 million, corresponding to 88.3% of total operating costs in
2006 (Exhibit 7).
 Other costs amounting to USD1.8 million include principally expenses covering

transportation, insurance, cement bags, spare parts, and clearing charges paid to
Kuwait Port Authority.
Case Study
In the last five years ended December 31, 2006, the company purchased cement
from approx. 15 cement producers across Middle Eastern and Asian markets.
In order to hedge against fluctuating cement and shipping prices, Cemento
principally entered into annual contracts, minimizing quantities purchased from spot
markets.
 In addition, most contracts were being negotiated on a C&F (pricing is inclusive

of shipping costs) basis to avoid exposure to fluctuation in shipping rates.
For 2007, the company had already negotiated and signed contracts to import
cement covering a significant portion of its forecasted annual requirements at a
cost which would allow the firm to lock in a gross profit per ton of around USD6.5
for the year.
Case Study
Cemento now employed 53 people, with 79% of all employees focused on
operating the
Company’s terminal operations (Exhibit 9).
Case Study
In order to prepare the company for growth, Cemento was now planning to increase
its staff base from 53 employees in 2006 to 75 employees in 2007 with a focus on
expanding the company’s:
(1) sales force from 2 employees in 2006 to 5 employees in 2007

(2) operations staff from 42 employees in 2006 to 61 employees in 2007.
 As a result, Cemento was expected to create new capacity for future growth by
bringing its employee productivity level below its current level of 17,500 tons
per operations employee.
 The company considered a long-term productivity level of approx. 19,000 tons per
employee as efficient.
Case Study
Exhibit 10 below provides select salary data points:
Case Study, Cemento Income Statement

Case Study, Cemento Income Statement

Illustrating Rule 1, 2 , 4 and 5

Example: Revenues
Illustrating Rule 1, 2 , 4 and 5 (Continued)

Illustrating Rule 1, 2 , 4 and 5 (Continued)

Illustrating Rule 3 (Continued)

References
1. Aswath Damodaran (2001), The dark side of valuation: Valuing young, distressed, and
complex Businesses( 2nd ed.) ,FT Press.
2. Alastair L. Day (2012), Mastering financial modeling in Microsoft excel(3rd ed.), FT
Publishing.
3. Simon Benninga (2008), Financial modeling (3rd ed.) MIT Press.
4. Chandan Sengupta (2010), Financial analysis and modeling( 2nd ed.), Wiley Finance.
5. Masari, M., & Gianfrate, G. (2014). The valuation of financial companies: Tools and
techniques to value banks, insurance companies, and other financial institutions (1st ed.).
Wiley Finance.
6. Koller, T., & Goedhart, M. (2010). Valuation: Measuring and managing the value of
companies (5th ed.). Hoboken, N.J.: John Wiley & Sons.
7. Kieso, D., Weygandt, J., & Warfield, T. (2014). Intermediate accounting (15th ed.). Wiley
John, & Sons, Incorporated

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Advanced Modeling and Valuation

Project Finance and Manufacturing Companies

You will learn to model the following:

• Pro forma financial statements

Pro Forma Financial Statements

Pro Forma Financial Statements

Fixed Assets= X If sales < A

 In order to solve a financial-planning model, we must distinguish between those

Pro Forma Financial Statements

Pro Forma Financial Statements

-How do we guarantee that assets and liabilities are equal?

Pro Forma Financial Statements

Cash and Marketable Securities = Total Liabilities and Equity

Check example on Excel Spreadsheet

Pro Forma Financial Statements

 New level of sales= Initial Sales * (1+Sales growth) year

Interest payments on debt=Interest rate on debt*Average debt over the year

Interest earned on cash and marketable securities = (Interest rate on cash *

Pro Forma Financial Statements

 Depreciation Expense= (Depreciation rate * Average fixed assets at cost over

Profit before taxes = Sales – COGS - Interest payments on debt + Interest

Taxes = Tax rate * Profit before taxes

Profit after taxes = Profit before taxes – Taxes

Dividends = Dividend Payout ratio * Profit after taxes

Retained Earnings = Profit after taxes - Dividends

Pro Forma Financial Statements

Current Assets = (Current Assets/Sales)*Sales

Net Fixed Assets = (Net fixed assets/Sales)*Sales

Pro Forma Financial Statements

Current liabilities = (Current liabilities/Sales)*Sales

In the simple example in Excel we assumed that debt is not changing,

Also, the simple example in Excel assumed stock doesn’t change

Circular References in Excel

Microsoft Office Button |Excel Options |Formulas |Calculation Options

Make sure in ‘Calculation Options’| Automatic button is clicked

Cash Flow Statement Modeling

Usefulness of the Statement of Cash Flows

1. Entity’s ability to generate future cash flows.

2. Entity’s ability to pay dividends and obligations.

3. Reasons for difference between net income and net

4. Cash and noncash investing and financing transactions.

Classification of Cash Flows

Income Changes in Changes in

Classification of Cash Flows

Classification of Cash Flows

Cash and Cash Equivalents

 So near their maturity that they present insignificant risk of

Generally, only investments with original maturities of three months

Format of the Statement of Cash Flows

Report inflows and outflows from investing and financing

Three Major Steps:

Net Cash Flow from Operating Activities—

Some Notes on the Valuation Procedure

 Terminal value = Year-5 book value of debt + Equity

Terminal value = (Enterprise market/book multiple)*(Year-5 book value of debt +

Terminal Value = P/E ratio*Year 5-profits + Year-5 book value of debt

Terminal value = EBITDA ratio or multiple*Year-5 anticipated EBITDA

Some Notes on the Valuation Procedure

Some Notes on the Valuation Procedure

1-Debt and Debt equivalents(Pension funds)- (Eliminate Cash and Marketable

Some Notes on the Valuation Procedure

Some Notes on the Valuation Procedure

Data Tables (Sensitivity Analysis)

Check example on Excel Spreadsheet