Escolar Documentos
Profissional Documentos
Cultura Documentos
• Estimating Betas
• CAPM (Cost of Equity)
• Expected returns using different approaches
• Cost of Debt
• WACC analysis-Optimal Capital Structure
• Gordon Dividend Model-Supernormal growth (two stages and three
stages supernormal growth) and constant growth
• Case: Titan Cements Valuation
Keyboard Navigation Only on Ms Excel! CAFM® Principles
-Limited Use of the Mouse!
There are about 150 Excel shortcut keys that is embedded in Excel
(We will let you have access for all the shortcut keys on Excel!), yet
you should be familiar with the most important ones that all
professional financial modelers are expected to know and use!
(Note: Shortcut Keys change slightly depending on the Excel version you’re using)
The only way you can learn to develop good financial models is by
practicing a lot.
The primary objectives of this program are to show you how to learn
and practice financial modeling the right way and to provide you with a
wide range of real world financial models.
Importance of Financial Modeling CAFM® Principles
In Excel, we assume that you know the basics, and we’ll cover the
advanced features of Excel that you need for modeling in detail.
VBA will be one of the important languages you will learn from this
program. We assume that you know nothing about it!
VBA is a powerful and very useful tool that is already embedded in your
MS Excel.
Prior Knowledge CAFM® Principles
Very few people use VBA in modeling because they are afraid of
learning “programming”.
We will teach you VBA and modeling with VBA using a simple class-
tested approach.
The key is to learn VBA as a language the same way you learned your
mother tongue
You will be surprised to find out how little you have to learn to be able to
develop models with VBA that are often more useful, powerful, and
flexible than Excel models.
Prior Knowledge CAFM® Principles
Finally, we assume that you are new to modeling. Even if you have
some experience, you will quickly find yourself challenged as you build
on your skills.
You will learn by imitating and practicing on numerous models from all
areas of finance, and you will be able to challenge yourself further by
developing extensions to these models.
A Financial Model is a Statistical Tool CAFM® Principles
• In developing a financial model, the basic thing you are doing is
summarizing a complex set of technical and economic factors into a
number (such as value per share, IRR or debt service coverage).
• Naseem Taleb:
– In the not too distant past, say the pre-computer days, projections
remained vague and qualitative, one had to make a mental effort to
keep track of them, and it was a strain to push scenarios into the future.
It took pencils, erasers, reams of paper, and huge wastebaskets to
engage in the activity. The activity of projecting, in short, was
effortful, undesirable, and marred with self doubt.
– But things changed with the intrusion of the spreadsheet. When you
put an Excel spreadsheet into computer literate hands, you get
projections effortlessly extending ad infinitum. We have become
excessively bureaucratic planners thanks to these potent computer
programs given to those who are incapable of handling their
knowledge.
Steps in Creating A Model CAFM® Principles
Whether you are creating a financial model using Excel or VBA, you must
take a systematic approach. A systematic approach always involves
planning ahead and this takes some time.
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.
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.
Make sure your model has plenty of cross-checks to ensure that (1) assumptions make sense and (2) your
model is built properly.
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.
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.
LOOKUP Functions CAFM® Principles
LOOKUP (Vector Form)-We are covering those functions because you are likely
to use in financial modeling
Lookup_value: is the value that LOOKUP searches for in the first vector- it can be a
number, text, a logical value, or a name or reference that refers to a value.
Lookup_vector: is a range that contains only one row or one column-The values in
it can be text ( A..Z), or numbers(-1,0,1), or logical values (True, False).
Result_vector: is a range that contains only one row or column. It must be the
same size as lookup_vector
LOOKUP Functions CAFM® Principles
If LOOKUP cannot find the lookup_value It matches the largest value in the
lookup_vector that is less than the lookup_value. This make it possible to lookup
values where the lookup_value falls in range instead of matching a specific value.
If the lookup_value is smaller than the smallest value in the lookup_vector
LOOKUP gives the #N/A error value
For example: The tax table in the following figure provides information for
calculating taxes for a single filer given his/her taxable income. In the table, the
marginal tax rate is 10% and the base tax amount is $0 for taxable income up to
$8,025. For income between $8,025 and $32,550 they are 15% and
$802.50, respectively; and so on.
Here is how you will use the LOOKUP function to look up the marginal tax rate and
the results you will get for various taxable incomes.
HLOOKUP and VLOOKUP are parallel functions that work the same way- They
are known as the array form.
HLOOKUP: Searches for a value in the top row of a table or an array (range) of
values and then returns the value from a specified row in the same column of the
table or array.
VLOOKUP: Searches for a value in the left most column of table or array (range)
and then returns a value from a specified column in the same row of the table or
array.
Use HLOOKUP when your comparison values are located in a row across the top
of a table of data, and you want to look down a specified number of rows.
Use VLOOKUP when your comparison values are located in a column of the left of
the data you want to find.
HLOOKUP and VLOOKUP Functions CAFM® Principles
HLOOKUP (lookup_value,table_array,row_index_num,range_lookup)
If range_lookup is TRUE, then the values in the first row of table_array must be
placed in ascending order.
In other words, if an exact match is not found, the largest value that is less than
lookup_value is returned.
If FALSE, HLOOKUP will look for an exact match. If one is not found, the error
value #N/A! is returned. This argument is optional, and if omitted is assumed to be
TRUE.
For example:
OFFSET: Returns the reference to a single cell or a range of cells that is specified
number of rows and columns from a cell or range of cells.
Base_reference: is the reference to the base cell or range from which the resulting
reference is to be calculated.
Rows: is the number by which the row number of the resulting reference is to be
offset from that of the base_reference.
Columns: Work in the same way.
Heights and Width: specifies the number of rows and columns to be included in
the resulting reference
Both concepts, present value and net present value, are related to the value today
of a set of future anticipated cash flows.
Present Value (PV): is used if you need to discount all cash flows expected future
cash flows ( Use if Cash Flows are equal).
Net Present Value (NPV): is used to net expected cash flows to its value today (
i.e: Expected revenues –initial investment), Use if Cash Flows are NOT equal.
PMT: Calculates the loan payment based on constant payments and constant
discount rate
=PMT(rate,nper,pv,[fv],[type])
Loan Schedule:
If we graph the NPV ( Y-axis) and the discount rate on (X-axis) and the NPV graph
crosses the x-axis twice Then we have Two different IRRMIRR
5.00
Two IRRs
0.00
Net present value 0% 10% 20% 30% 40%
-5.00
-10.00
-20.00
-25.00
Excel’s IRR function allows us to add an extra argument that will help us find both
IRRs.
NPV
400
200
0
-200 0% 5% 10% 15% 20%
-400
Discount rate
To be able to graph the NPV, you should learn how to construct a data table
The XNPV and XIRR functions can be used if the cash flows are occurring not
on fixed periodic intervals ( i.e.: not semiannual, or annual).
They allow us to do computations on cash flows which occur on specific dates
that need not to be even intervals.
XNPV and XIRR Functions CAFM® Principles
XIRR: The function [puts annualized return. It works by computing the daily IRR
and annualizing it, XIRR=(1+DailyIRR)^365 -1
XNPV: Computes the net present Value of a series of cash flows occurring on
specific dates
Gordon Model: The value of a share is the present value of the future
anticipated dividend stream from the share, where the future anticipated
dividends are discounted at the appropriate risk-adjusted cost of equity, Re
Gordon Model:
Gordon Model and Cost of Equity CAFM® Principles
Using the Gordon Model you can calculate the implied cost of equity the market
is using.
The Growth rate (g) should not be greater than the cost of equity (Re), or else
the Gordon Model wouldn’t work.
This will yield us to divide the company growth into phases (Phase one:
Supernormal Growth where g>Re, and Phase Two: Where g is expected to remain
constant and lower than the cost of equity till perpetuity.
Beta is calculated using regression analysis, and you can think of beta as the
tendency of a security's returns to respond to swings in the market.
A beta of 1 indicates that the security's price will move with the market.
A beta of less than 1 means that the security will be less volatile than the market.
A beta of greater than 1 indicates that the security's price will be more volatile than
the market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile
than the market.
Many utilities stocks have a beta of less than 1. Conversely, most high-tech, Nasdaq-
based stocks have a beta of greater than 1, offering the possibility of a higher rate of
return, but also posing more risk.
Beta, β Modeling CAFM® Principles
If you would like to calculate the β of a stock, you should:
1- Get at least a 5 year historical price of the stock (The prices could be monthly prices).
2-Rearrange the prices from oldest to newest.
3-Calcualte the returns of the stock by: (Pe-Pi/Pi).
4-Decide to which benchmark index you would like the stock to be compared.
5-Get at least 5 year historical prices of the benchmark index
6-Rearrange the prices of the index from oldest to newest
7-Calculate the returns of the index by: (Pe-Pi/Pi)-Some modelers use ln(Pe/Pi)
8-Get the Slope between Returns of the stock (Y-axis) and the Return of the Benchmark(X-
axis)
8-Calculate the Covariance of the returns between the stock and the benchmark
9-Calculate the Variance of the returns of the benchmark
To calculate the Cost of equity using the Capital Asset Pricing Model.
The rate applied to determine the cost of debt (Rd) should be the current market
rate the company is paying on its debt.
If the company is not paying market rates, an appropriate market rate payable by
the company should be estimated.
The estimated value could be computed from:
1-The most recent issued debt by the company (Figure our the yield of this debt)
2-If you don’t have access neither to the current market borrowing rate specified for
the company nor the yield of the most recent issued debt, you should use your
common sense in such a situation.
Because companies benefit from the tax deductions available on interest paid, the
net cost of the debt is actually the interest paid less the tax savings resulting from the
tax-deductible interest payment.
Weighted Average Cost of Capital CAFM® Principles
All else equal, the WACC of a firm increases as the beta and rate of return on
equity increases, as an increase in WACC notes a decrease in valuation and a
higher risk.
The WACC equation is the cost of each capital component multiplied by its
proportional weight and then summing:
Weighted Average Cost of Capital CAFM® Principles
1. FCFF - free cash flows to the firm: The most traditional method, in which operating
and investment cash flows are discounted using WACC
2. FCFE - free cash flows to equity: In which cash flows are discounted using cost of
equity
3. CCFF - capital cash flows the firm: In which capital cash flows (CCFE = FCFE +
CFD, CFD-cash flows to debt) are discounted using weighted average cost of capital
before tax
4. CCFE - capital cash flows to equity: In which capital cash flows (CCFE = FCFF-
CFD, CFD-cash flows to debt) are discounted using adjusted cost of equity before tax
5. EVAF - incremental economic value added to the firm: In which economic cash
flows to the firm are discounted using WACC
Basic Concepts for Valuation Models CAFM® Principles
7. ECFF - economic cash flows to the firm: In which economic cash flows against
initial book value of equity and debt are discounted using WACC
8. ECFE - economic cash flows to equity: In which economic cash flows against
initial book value of equity are discounted using cost of equity
9. BRAF - business risk adjusted free cash flows to the firm: In which cash flows
are
discounted using unlevered cost of capital
10.BRAE - business risk adjusted free cash flows to equity: In which cash flows
are
discounted using unlevered cost of capital
Basic Concepts for Valuation Models CAFM® Principles
11. RFAF - risk-free-rate adjusted free cash flows to the firm: In which cash flows
are
discounted using risk-free interest rate
12. RFAE - risk-free-rate adjusted free cash flows to equity: In which cash flows
are
discounted using risk-free interest rate
13. APVF - adjusted present value: In which cash flows to the firm are discounted
using
unlevered cost of capital
14. APVE - adjusted present value: In which cash flows to equity are discounted
using
unlevered cost of capital
15.FEVA - financial and economic value added: Which decomposes cash flows into
various
streams, and discounts them with unlevered cost of capital
Basic Concepts for Valuation Models CAFM® Principles
16. DDM - dividend discount models: In which dividends and cash surpluses are discounted
using cost of equity
17. Decomposition method: In which operating, investment, tax shield cash and differences
between equity cost of capital and external cost of capital flows are discounted using cost
of equity.
The Value of an Enterprise Assets (Va) = Value of debt (Vd) + Value of Equity (Ve)
Note: Despite varying world all 17 discounting methods give the same values of the firm
and equity.
Dividend Discount Model-DDM CAFM® Principles
D0( 1 + g1 ) Dn( 1 + g c )
t
n 1
P0 = ∑ +
t =1 ( 1 + Re ) Re -g ( 1 + Re )
t n
Relative Valuation: (Easy and widely used, yet you shouldn’t use it blindly!)
To do relative valuation:
1- Earnings Multiples
3- Revenues
– Price/Sales per Share (PS)
– Value/Sales
Relative Valuation:
- Too many people who use a multiple have no idea what its cross
sectional distribution is. If you do not know what the cross sectional
distribution of a multiple is, it is difficult to look at a number and pass
judgment on whether it is too high or low.
Multiples in Relative Valuation CAFM® Principles
3- Analyze the multiple
- It is critical that we understand the fundamentals that drive each
multiple, and the nature of the relationship between the multiple and
each variable.
You Should ask yourself the following every time you are using a
multiple for Relative Valuation:
-Both the value (the numerator) and the standardizing variable ( the
denominator) should be to the same claimholders in the firm. In other
words, the value of equity should be divided by equity earnings or equity
book value, and firm value should be divided by firm earnings or book
value.
CAFM® Principles
Note: Tax rate should be the effective tax rate. In most cases the
marginal tax rate is approximately equal to the effective tax
rate.
Books References CAFM® Principles
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