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Overview:
The purpose of the Business Analysis and Valuation Model (hereafter, the “BAV Model”) is to aid users in
analyzing and valuing any company with at least two years of historical financial statement data. Table 1
below provides a brief overview of the 14 worksheets that comprise the BAV Model. A detailed review of each
worksheet and accompanying instructions follow in the Worksheet Instructions section.
Overview and Instructions To provide an overview of the structure and functionality of the BAV
Model, as well as specific worksheet instructions.
Imported Income Statement Because firms use different nomenclature and reporting structures in
Imported Balance Sheet their financial statements, it is necessary to standardize a firm’s
Imported Statement of Cash Flows historical financial statements. This is achieved by importing the
historical financial statements into the BAV Model, and completing a
financial statement line-item classification process.
Classification Lookup Provides help in the line-item classification process using examples of
financial statement line-items that are commonly found under a given
classification heading.
Standardized Financial Statements Standardized financial statements are the result of the line-item
classification process and serve as the foundation for subsequent
accounting and financial statement analysis.
BAV Identities The BAV Identities worksheet defines the income statement and
balance sheet identities that comprise the Condensed Financial
Statements.
Condensed Financial Statements The Condensed Financial Statements serve as the foundation for the
pro forma financial statements.
Ratio Analysis The Ratio Analysis worksheet provides a detailed breakdown of ratios
used in evaluating profitability and operating, investment, and
financial management. Ratio analysis can aid in both better
understanding the historical performance of the firm and in evaluating
the reasonableness of your Key Assumption inputs.
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Key Assumptions The Key Assumptions worksheet allows you to set forth your
expectations for the firm’s performance throughout the forecast
horizon.
Performance Charts The Performance Charts worksheet provides a visual reference for
comparing the firm’s projected performance to both its historical
performance and to the historical performance for comparable U.S.
firms.
Pro Formas & Valuation The Pro Formas & Valuation worksheet provides forecasted financial
statements (based on the Condensed Financial Statements and your
Key Assumption inputs) and demonstrates valuation under the
Discounted Cash Flows, Abnormal Earnings, and Abnormal Returns
valuation approaches.
Valuation Summary The Valuation Summary worksheet reports the valuation results, the
net effect of selected accounting adjustments, and restates the key
assumptions underlying the valuation results.
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4. Providing Feedback in the Event of a Technical Error
In the event that you encounter a technical error in the process of using the BAV Model, please let us know by
visiting this website for support information: http://www.hbs.edu/it/bav/. Please include a brief description of
the error, and specify the operating system (e.g., Windows 2000, Windows XP), version of Excel (e.g., 2000,
XP, 2003), and BAV Model version number you are working with (e.g., BAV Model v.4.0). To identify your
BAV version, go to the ‘BAV Navigator’ menu and select ‘About BAV Model’.
Step 1:
Complete the Initial Setup.
Step 2:
Import historical income statement, balance sheet, and statement of cash flow data for the company you wish to
value into the worksheets titled “Imported Income Statement”, “Imported Balance Sheet”, and “Imported
Statement of Cash Flows”, respectively.
Step 3:
Recast the imported data from step 1 into a standardized format shown in the Standardized Financial Statements
worksheet. This is accomplished by completing the line-item classification process (described below) for each
of the imported financial statements.
Step 4:
Make any accounting adjustments that are warranted.
Step 5:
Input assumptions regarding the company’s future performance in the Key Assumptions worksheet.
Note:
In version 4.0 of the BAV Model, the availability of the Compustat WRDS download feature automatically
completes Steps 1-3 for authorized Compustat WRDS users.
1. Instructions
A complete set of instructions are provided in this document and can be printed in the usual manner.
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2. BAV Dashboard Worksheet
The BAV Dashboard is a useful guide for new users of the BAV Model. As Exhibit 1 shows, the BAV
Dashboard is comprised of 8 ordered steps which, when followed in sequence, guide the user through the basic
steps of using the BAV model. To begin, select Step 1 by clicking on the first orb and you will be taken to the
Imported Income Statement worksheet where the process begins. After completing the required steps on the
imported financial statement worksheets (e.g., the Imported Income Statement, Imported Balance Sheet, and the
Imported Statement of Cash Flows), selecting the “Return to BAV Dashboard” hyperlink in the upper left
corner of any of the worksheets will take you back to the Dashboard, where you can proceed to the next step.
After selecting one of the eight Dashboard steps and visiting the associated model worksheet(s), upon returning
to the Dashboard, the step selected will automatically contain a check mark in the box at the bottom of each of
the orb, indicating that you have previously visited the related worksheet(s). These check marks help you to
keep track of the steps taken and those that remain. Please note that use of the BAV Dashboard is optional, and
as a basic guide, it does not represent the full functionality of the BAV Model. Once you are familiar with the
BAV Model worksheets, you may prefer to use the BAV-Navigator menu, which not only provides links to all
of the model worksheets, but also contains a host of additional features that are described below.
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3. Worksheet “Overview and Instructions” Hyperlinks
Each worksheet that requires user input includes an ‘Overview and Instructions’ hyperlink in the upper left
corner that takes you to the specific portion of the instructions that pertain to that worksheet.
5. Color-coding
The BAV Model uses yellow shading to identify each cell requiring user input. Such “input cells” either
require you to enter text or a numeric value, or they contain a drop-down menu from which a selection is
required (see Exhibit 4).
Yellow-shaded input cells must not be left blank. * If the value for a yellow-shaded cell is zero, enter “0”
in that cell. *With the exception of select cells in the Accounting Adjustments worksheet -- Step 4 below -- all
yellow-shaded cells require user input. On the Key Assumptions worksheet, yellow-shaded input cells may be
located adjacent to gray-shaded cells. In contrast to yellow-shaded cells which require you to enter an input,
gray-shaded cells indicate that additional inputs are possible, but they are not required in all instances. Cells
without shading are output cells (containing either calculated or posted numbers) and are write-protected; any
attempt to overwrite these cells will prompt an error message.
Exhibit 4. BAV Model Cell-Shading (input cell and drop-down menu cell)
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workbook (see Exhibit 5(a)). As shown in Exhibits 5(b), 5(c), 5(d), and 5(e), the BAV-Navigator menu also
includes a Custom Report Generator, which allows you to select desired worksheets for printing, a Clear
Selected Sheets menu, which provides options for clearing entire sections of the workbook, and Scenario
Management tools (described below).
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Exhibit 5(c). BAV-Navigator - Clearing Selected Worksheets
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Exhibit 5(d). Scenario Manager - Name and Save Scenarios 1-5
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instructions for manually importing financial statements are the same as those that pertain to non-Compustat
WRDS users and begin in the section titled “Step 1. Initial Setup”.
Click here to skip the WRDS instructions and go directly to “Step 1. Initial Setup”
Selecting the “Download Company Financials from Compustat WRDS” button will prompt the “WRDS
Download Details” form. Where indicated, enter the company’s ticker symbol (e.g., AMZN for Amazon.com) ,
the starting and ending years corresponding to the financial statements you desire (e.g., 1997 and 1999,
respectively), and your WRDS username and password. Please note that if you initiate a subsequent download
request, your username will be retained, however, you will need to reenter your password for protection
purposes. Also note that if you are unsure of the company’s ticker symbol, you can select the “Ticker Look
Up” button, which will allow you to perform a search by company name or ticker symbol. Once you have
completed the download details form, select the “Download” button at the bottom of the form to initiate the
download request. Please note that the download process can take up to 30 seconds. For best results, do not
activate other programs during the download process.
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Exhibit 7. Completing the WRDS Download Details Form
As soon as the download process is finished, you will be notified that the process was completed successfully.
At this point, the yellow cells in Step 1 of the Initial Setup will have been automatically filled-in, and you will
be directed to proceed to Step 2: Select Valuation Type.
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Exhibit 8. WRDS Download Request Completed Successfully
After selecting either Equity or Asset Valuation from the Step 2 drop-down menu, proceed directly to the
Standardized Financial Statements worksheet to view the downloaded financial statements.
At this stage, you are now able to verify whether the financial statements data that have been downloaded are
complete and are consistent with your understanding of the firm and its business. Often, the Compustat
database does not contain full details of the breakdown of net interest expense into the constituent interest
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income and expense items. If you have additional details available, you can type revised figures in the
appropriate cells in the imported financial statements worksheets. More generally, you can make changes, as
needed, to the imported financial statements by following the instructions below pertaining to non-Compustat
WRDS users, in the section titled “Step 1. Initial Setup”.
Note:
The WRDS auto download feature can be used repeatedly if desired. If you initiate a subsequent download
request, the newly downloaded data will overwrite the data initially retrieved. In the event that you manually
imported data for a company not contained in the WRDS database (instructions for doing so follow) and
subsequently decide to analyze a company that is contained in WRDS without saving the workbook and
opening a new model template, you will first need to clear the imported financial statements worksheets. To do
so, select the “Clear Selected Sheets” option from the BAV-Navigator drop-down menu located in the
workbook’s top menu bar and then select the clear “Imported Financials” option. In addition, if you identified
Key Assumptions and/or performed one or more Accounting Adjustments and want to clear these inputs as
well, you can do so by following the same steps (BAV-Navigator>Clear Selected Sheets>…) and select the
clear “Key Assumptions” and/or clear “All Accounting Adjustments” options.
Your first step in using the BAV Model is to complete the Initial Setup at the top of the Imported Income
Statement worksheet (see Exhibit 10). As detailed below, the Initial Setup consists of two basic steps: (1)
identifying the name of the firm being analyzed, the years for which its historical financial data is to be
inputted, as well as critical information for standardizing this data, and (2) selecting the type of valuation (firm
equity or assets).
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Please note that the BAV Model requires the Initial Setup to be completed before proceeding
to Step 2.
Exhibit 10. Initial Setup - (top portion of the Imported Income Statement worksheet)
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Step 2.Importing Historical Financial Statement Data (including the income
statement, beginning balance sheet, and statement of cash flows) for the
company being analyzed
Please note that the imported financial data cannot be separated by blank columns.
Exhibit 11. Importing Historical Financial Statements
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balance sheet) for the years shown in the column headings (cells I5-R5). Also note that the range of historical
balance sheet years that the model can accommodate is bounded by the “earliest” and “latest” income statement
dates entered in the Initial Setup in the Imported Income Statement. The minimum number of historical
balance sheet years is defined as the two most recent years (e.g., the beginning balance sheet for the Latest
income statement year and the ending balance sheet for the Latest income statement, which is the beginning
balance sheet for the first forecast year). The maximum number of imported historical balance sheet years is
the same number of years of imported income statement data.
Reminder:
The imported financial data cannot be separated by blank columns.
Reminder:
The imported financial data cannot be separated by blank columns.
Click on a yellow-shaded classification cell, thereby activating the classification drop-down menu, and
select the menu label that corresponds to the firm’s imported label located in the adjacent cell in column H
(see Exhibit 12).
You must assign classification labels for each non-sub-total line-item. Drop-down menu labels also
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include select sub-total headings (e.g., Net Income, Total Assets, etc.) that also must be used.
If you have a question about the appropriate classification menu label to assign to a given line-item, select
the “Questions?” button next to the “Classifications” heading (see cell D15 in Exhibit 12 below). Doing so
will take you to the Classification Lookup worksheet in which you can select any of the classification
menu labels and view a sample of financial statement line-item labels classified under that menu heading.
The “Return to” buttons will take you back to the imported financial statement worksheet.
Note:
Because of the variability in reporting practices regarding the number of common shares outstanding (often
reported in the income statement, other times in the balance sheet or in the footnotes to the financial
statements), common shares outstanding can be classified in either the Imported Income Statement or in the
Imported Balance Sheet worksheets. In the event that shares outstanding are not reported in either the income
statement or the balance sheet, the number of shares outstanding must be manually entered in cell O54 of the
Key Assumptions worksheet. Also note that the number of shares outstanding must be expressed in the same
units that are used for the imported financial statements.
Step 3. Contd. Reporting Variability and the Need for Changing Signs (+/-)
Though revenues are uniformly presented in the income statement as positive numbers, the reporting of both
expenses and other sources of income varies across firms. Some firms present expenses as positive numbers
(though they are treated as negative numbers in sub-total calculations), others present expenses as negative
numbers (e.g., -100 or (100)). Similarly, some firms report “other” sources of income as positive numbers,
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while others report them as negative numbers. Given this variability, the final step in the financial statement
line-item classification process is to tailor the BAV Model to conform to the firm’s reporting preferences by
indicating the need to change the sign (+ or -) of certain line-items.
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Statement of Cash Flow Sign Changes
Firms’ reporting of cash flow information varies across both time and geography. All U.S. companies are
required to include a statement of cash flows in their financial statements under Statement of Financial
Accounts Standard No. 95 (SFAS 95). Most firms outside the U.S. (and U.S. firms prior to SFAS 95) report a
funds flow statement rather than a statement of cash flows. Funds flow statements show working capital flows,
rather than cash flows. Using the ‘Change Sign?’ drop-down menu in column F of the Imported Statement of
Cash Flows worksheet, you are able to convert a funds flow statement into a cash flow statement.
The standardized cash flow statement will only be correct if the firm reports cash inflows as positive
numbers, and cash outflows as negative numbers. As shown in Exhibit 13(b), if the firm you are analyzing
does not use this format (e.g., it shows both cash/fund inflows and cash/fund outflows as positive numbers) you
will need to use the ‘Change Sign?’ drop down menu in column F to identify which rows are cash outflows and
require changes in signs.
Looking left to right, the Standardized Financial Statements show the “As Reported” line-item values. As
described in the Accounting Adjustments section below, upon completion of an accounting adjustment, the
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Standardized Financials worksheet will also show both the net effect of all accounting adjustments, and the
“Adjusted Balance” (i.e., the “As Reported” values plus the net effect of all accounting adjustments) for each
line-item.
As shown in the top portion of Exhibit 15, instructions for completing accounting adjustments are shown at the
top of the Accounting Adjustments worksheet. To make one or more accounting adjustments, first navigate to
the Accounting Adjustments worksheet using either the “Adjust?” buttons located in column A of the
Standardized Financial Statements worksheet, the BAV-Navigator, or simply select the Accounting
Adjustments worksheet tab at the bottom of the screen.
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Begin by entering the company’s marginal tax rate in cell D4. Next, with the desired adjustment in mind,
review the accounting adjustment category headings in the Menu of Financial Statement Adjustments to
identify the appropriate adjustment category. Using the “Expand/Collapse” buttons in the left margin, select the
desired adjustment category. Once the accounting adjustment category is selected, a sub-menu of specific
accounting adjustments will appear. Select specific adjustments by placing a check-mark (left-click) in the
corresponding box(es). As each box is checked, a template for the selected adjustment will appear below the
adjustments menu (you will need to scroll down the worksheet or click the ‘Go to Entry Form’ link to view).
Specific instructions for each adjustment template are revealed (or hidden) by selecting the “Show
Instructions/Hide Instructions” button at the top of each template.
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contain a reconciliation check to make sure that the adjustment inputs reconcile. If a reconciliation error exists,
the amount of the imbalance will appear in bold red font at the bottom of the adjustment template.
Though a wide range of factors are considered in determining forecast assumptions, the Key Assumptions
worksheet only requires input for a select group of ratios. The components that comprise the Key Assumption
ratios are defined on the BAV Identities worksheet (see Exhibit 16). These identities, in turn, collectively
form the firm’s condensed income statement and balance sheet shown in the Condensed Financial Statements
worksheet (see Exhibit 17).
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Exhibit 17. Condensed Financial Statements worksheet
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Exhibit 18. Ratio Analysis worksheet
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Exhibit 19(a). Performance Charts worksheet - scaled to U.S. Comparables
Exhibit 19(b). Performance Charts worksheet - scaled to the firm’s historical performance
The forecasting process should be embedded in an understanding of how various financial statistics behave on
average. Absent detailed information to the contrary, one would expect sales and earnings numbers to persist at
their current levels, adjusted for overall trends of recent years. However, rates of return on investment (ROA
and ROE) tend, over several years, to revert close to the Weighted Average Cost of Capital and to the Cost of
Equity Capital, respectively. Profit margins also tend to revert to a normal level that varies widely across firms
and industries, depending on levels of asset turnover and leverage. Some firms are capable of creating barriers
to entry that enable them to fight these tendencies toward normal returns, even for many years, but
such firms are the unusual cases.
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b) In the Forecast Horizon text box (shown below), enter the number of years for the firm’s forecast horizon.
The forecast horizon can be thought of as the number of years that you expect it will take for the firm to
reach a steady-state operating performance level. The minimum forecast horizon is two years and the
maximum is 15 years.
c) Enter growth rate, profit margin, and productivity-related assumptions for the desired number of forecast
years in rows 12-15 (see Exhibit 21).
Note:
For firms with four to ten years of imported historical financial data, the “Show Early Years” button in Exhibit
cell D2 can be used to view the trend line performance of the firm along these dimensions throughout the
period.
d) Enter assumptions for the same line-items for the terminal forecast period in cells O19-O22. The terminal
period begins in the year following the selected forecast horizon.
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when you have valued the firm you can re-estimate its market leverage and enter revised ratios. After doing
this several times, the forecasted market leverage ratios should be consistent with your valuation.
f) Confirm that the number of common shares outstanding is reported in cell O54. If not, enter the number of
shares outstanding, using the same units used for the financial statements.
Note that if in a given year you change the firm’s book leverage (or carry forward the prior year’s values in
anticipation of making changes in future periods), you must also change (or carry forward) the firm’s market
leverage and cost of capital parameters in that year. Based on these estimates, the model shows imputed betas
for debt, preferred stock, and common equity, assuming that the firm’s asset beta remains fixed. Adjustments to
the firm’s asset beta are permitted in forecast year 2 and beyond. Note that the asset beta will change only if the
firm’s business changes.
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Valuation Worksheets:
Pro Formas & Valuation worksheet
The Condensed Financial Statements and your Key Assumption inputs collectively determine the firm’s pro
forma financial performance during the forecast horizon. The Pro Formas & Valuation worksheet consists of
four panels showing the Pro Forma Financial Statements (shown in Exhibit 23 below), followed by valuations
under the Discounted Cash Flow, Abnormal Earnings, and Abnormal Returns valuation methods, respectively.
To aid in navigating the Pro Formas & Valuation worksheet, a “Display Control” box (shown in Exhibit 23)
provides several display options. As the names imply, “Pro Forma Only” shows just the Pro Forma, while
“Show All” shows the Pro Forma and all three valuation panels. You can also choose to look at the pro forma
along with any of the three valuation panels.
Note:
That while reviewing the Pro Formas and Valuation worksheet, the Auditing Toolbar shown in Exhibit 24 (go
to Tools | Auditing | Show Auditing Toolbar) can be used to show the relations between various cells in the
worksheet.
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Exhibit 24. Pro Forma Financial Statements and the Auditing Toolbar
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