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Financial Modeling and Valuation

Financial modeling is a representation in numbers of a company's operations in the past, present, and forecasted future. Such models are intended to be used as decision-making tools by company executives. Some common types of financial models include discounted cash flow models, merger models, initial public offering models, and three statement models. Financial models link a company's income statement, balance sheet, and cash flow statement to estimate the valuation of a business or compare business performance under different scenarios.

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532 views

Financial Modeling and Valuation

Financial modeling is a representation in numbers of a company's operations in the past, present, and forecasted future. Such models are intended to be used as decision-making tools by company executives. Some common types of financial models include discounted cash flow models, merger models, initial public offering models, and three statement models. Financial models link a company's income statement, balance sheet, and cash flow statement to estimate the valuation of a business or compare business performance under different scenarios.

Uploaded by

Saniya Memon
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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FINANCIAL

MODELING
AND
VALUATION
MEANING: Financial model.
A financial model is the summary of a company’s
performance, based on certain variables, that helps the
business forecast future financial performance. In other
words, it helps a company see the likely financial results of a
decision in quantitative terms. The measurements and skills
used to construct the model include knowledge of the
company’s operations, accounting, corporate finance,
and Excel spreadsheets.
These models are an amalgamation of those skills and are
put together based on performance and then used to
analyze how a business will react to different economic
situations or events. These are commonly used to estimate
the outcome of a specific financial decision before the
*Financial models are used to estimate
the valuation of a business or to compare
businesses to their peers in the industry. They also
are used in strategic planning to test various
scenarios, calculate the cost of new projects, decide
on budgets, and allocate corporate resources.
*Examples of financial models may include
discounted cash flow analysis, sensitivity analysis,
or in-depth appraisal.
MEANING: Financial modeling.
Financial modeling is a representation in
numbers of a company's operations in the
past, present, and the forecasted future.
Such models are intended to be used as
decision-making tools. Company executives
might use them to estimate the costs and
project the profits of a proposed new project.
Importance of Financial Modeling:

 Financial Modelling is the main core element to take


the major business decisions in a corporate
world. Financial models are the most valuable tools for
executing business choices to get perfect solutions. A
model can advise you regarding the grade of risk
associated with implementing certain decisions. They
can also be utilized to devise an effective financial
statement that reflects the finances and operations of
company. These models help online internet
businesses take quick decisions more confidently.
Uses of Financial Modeling:

 In the finance industry, the value of financial


modeling is increasing rapidly.
 Financial modeling acts as an important tool which
enables business ideas and risks to be estimated in a
cost-effective way.
 Financial modeling is an action of creating attractive
representation of a financial situation of company.
 Financial Models are mathematical terms aimed at
representing the economic performance of a
business entity.
Here is a list of the 10 most common
types of financial models:
 Three Statement Model
 Discounted Cash Flow (DCF) Model
 Merger Model (M&A)
 Initial Public Offering (IPO) Model
 Leveraged Buyout (LBO) Model
 Sum of the Parts Model
 Consolidation Model
 Budget Model
 Forecasting Model
 Option Pricing Model
1. Three Statement Model

 The 3 statement model is the most basic setup for


financial modeling. As the name implies, in this
model the three statements (income statement,
balance sheet, and cash flow) are all dynamically
linked with formulas in Excel. The objective is to
set it up so all the accounts are connected and a set
of assumptions can drive changes in the entire
model. It’s important to know how to link the 3
financial statements, which requires a solid
foundation of accounting, finance, and Excel skills.
2 Discounted Cash Flow (DCF) Model

 The DCF model builds on the 3 statement model to


value a company based on the Net Present Value
(NPV) of the business’ future cash flow. The DCF
model takes the cash flows from the 3 statement
model, makes some adjustments where necessary,
and then uses the XNPV function in Excel to
discount them back to today at the company’s
Weighted Average Cost of Capital (WACC).
 These types of financial models are used in equity
research and other areas of the capital markets.
3 Merger Model (M&A)

 The M&A model is a more advanced model


used to evaluate the pro forma
accretion/dilution of a merger or acquisition.
 It’s common to use a single tab model for
each company, where the consolidation of
Company A + Company B = Merged Co.  The
level of complexity can vary widely. This
model is most commonly used in investment
banking and/or corporate development.
4 Initial Public Offering (IPO) Model

 Investment bankers and corporate development


professionals also build IPO models in Excel to value
their business in advance of going public. These
models involve looking at comparable company
analysis in conjunction with an assumption about
how much investors would be willing to pay for the
company in question. The valuation in an IPO model
includes “an IPO discount” to ensure the stock
trades well in the secondary market.
 
5 Leveraged Buyout (LBO) Model

 A leveraged buyout transaction typically requires


modeling complicated debt schedules and is an
advanced form of financial modeling. An LBO is
often one of the most detailed and challenging of
all types of financial models, as the many layers
of financing create circular references and
require cash flow waterfalls. These types of
models are not very common outside of private
equity or investment banking.
6 Sum of the Parts Model

 This type of model is built by taking several DCF models


and adding them together. Next, any additional
components of the business that might not be suitable
for a DCF analysis (e.g., marketable securities, which
would be valued based on the market) are added to
that value of the business.  So, for example, you would
sum up (hence “Sum of the Parts”) the value of business
unit A, business unit B, and investments C, minus
liabilities D to arrive at the Net Asset Value for the
company.
 
7 Consolidation Model

 This type of model includes multiple business


units added into one single model. Typically,
each business unit has its own tab, with a
consolidation tab that simply sums up the
other business units.  This is similar to a Sum
of the Parts exercise where Division A and
Division B are added together and a new,
consolidated worksheet is created. Check out
CFI’s free consolidation model template.
8 Budget Model

 This is used to model finance for


professionals in financial planning &
analysis (FP&A) to get the budget together
for the coming year(s).  Budget models are
typically designed to be based on monthly or
quarterly figures and focus heavily on the
income statement.
 
9 Forecasting Model

 This type is also used in financial planning


and analysis (FP&A) to build a forecast that
compares to the budget model. Sometimes
the budget and forecast models are one
combined workbook and sometimes they are
totally separate.
10 Option Pricing Model

 The two main types of option pricing models


are binomial tree and Black-Scholes. These
models are based purely on mathematical
formulas rather than subjective criteria and,
therefore, are more or less a straightforward
calculator built into Excel.
Thank you!!

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