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Financial Modeling E-Book Part 3 of 4

Financial Modeling E-book


Part 3 of 4

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Completing the Income Statement Financial Modeling E-Book Part 3 of 4


Forecast shares outstanding
Reference back to historical count We will use the share count to calculate EPS and share repurchases Calculate remaining line items (except for Interest Expense/ Income) Calculate all relevant ratios for forecasting Calculate CAGR for all line items

* Separate Schedule for Interest expense would be developed later in the module

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Income Statement - Sample Financial Modeling E-Book Part 3 of 4

Assume constant at this stage

Forecast shares outstanding based on historical share count


Leave shares outstanding constant at this stage Alter the forecast of shares after drawing up Shareholders Equity Schedule and shares outstanding
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Income Statement - Sample Financial Modeling E-Book Part 3 of 4

Calculations

Complete the margins and growth rates on the Income Statement


Leave interest expense, interest income and taxes blank at this stage Calculate EBIT, pretax income and net income Take care to get the past data and calculations right in order to proceed smoothly
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Income Statement - Sample Financial Modeling E-Book Part 3 of 4

Complete the margins and growth rates on the Income Statement

Calculations

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Income Statement - Sample Financial Modeling E-Book Part 3 of 4

Calculations

Driver

Calculate forecasted taxes assume reasonable effective taxes


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Income Statement - Sample Financial Modeling E-Book Part 3 of 4

Calculate relevant CAGRs

Calculate relevant growth rates for forecast period


Ensure the long term growth rates, CAGR, are reasonable

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Shareholders Equity Schedule Financial Modeling E-Book Part 3 of 4


Equity Schedule Overview
Set up the line items and input past information Forecast
Share Repurchases Option proceeds & new shares issued for exercised options Dividends Future equity balances Ending balances to Balance Sheet Repurchase, options and dividends to Cash Flow Statement

Link up

* Separate Schedule for Interest expense would be developed later in the module

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Shareholders Equity - Sample Financial Modeling E-Book Part 3 of 4

Past data may be difficult to reconcile

Referenced from BS

Set up the Shareholders equity schedule


Input past information reconciliation of past data may be difficult, read through balance sheet to get cues Make provision in the model for share repurchase, options and dividends

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Shareholders Equity - Sample Financial Modeling E-Book Part 3 of 4

Inputs

Input past information on share repurchases

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Shareholders Equity - Sample Financial Modeling E-Book Part 3 of 4

Referenced from Income Statement

Assumption/ Driver

Calculations

Use reasonable estimates for EPS Multiple based on past trends or research

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Shareholders Equity - Sample Financial Modeling E-Book Part 3 of 4

Driver

Calculations

Calculate the amount spent on share repurchase plans


Consider past information on share repurchase plans Look out for research and management announcements on the same

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Shareholders Equity - Sample Financial Modeling E-Book Part 3 of 4

Inputs

Input appropriate past information on options exercised

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Shareholders Equity - Sample Financial Modeling E-Book Part 3 of 4

Inputs

Calculations

Assume reasonable levels of option conversions in the forecast period


Average strike price is commonly used to determine option proceeds Another approach is to assume total proceeds

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Shareholders Equity - Sample Financial Modeling E-Book Part 3 of 4

Inputs

Referenced from Income Statement

Calculations

Input all past information on dividends dividend per share would be an important measure, make sure to calculate the same
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Shareholders Equity - Sample Financial Modeling E-Book Part 3 of 4

Referenced from Income Statement

Calculations

Forecast estimated dividends using


Pay out ratio Fixed dividend outgo
Driver

Per share payout


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Shareholders Equity - Sample Financial Modeling E-Book Part 3 of 4

Referenced Assumption

Forecast equity account in its entirety

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Shareholders Equity - Sample Financial Modeling E-Book Part 3 of 4

Link up with Balance Sheet

Referenced from Shareholders Equity Schedule

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Shareholders Equity - Sample Financial Modeling E-Book Part 3 of 4

References

Link the projected change in equity schedule items to Cash Flow Statement

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Illustrative Flow of Funds Financial Modeling E-Book Part 3 of 4


Working Capital, Depreciation, Amortization, Other LT Items and Equity Schedules

Depreciation Sales

COGS

Income Statement Shareholders Equity Cash Flow Statement

Working Capital
Amortization

Change in WC

Working Capital

Amortization

PP & E, Depreciation

Balance Sheet

Other Long Term Items

Intangibles, Amortization

Intangibles

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Shares Outstanding Schedule Financial Modeling E-Book Part 3 of 4


Enter past share information
Basic Shares actual and average Capture past effects of options and convertibles as appropriate Diluted Shares - average

Reference Shares repurchased and new shares from exercised options


Calculate forecasted basic shares (actual)

Calculate average basic and diluted shares Reference projected shares to Income Statement (recall Income Statement Build up!)

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Shares Outstanding Schedule - Sample Financial Modeling E-Book Part 3 of 4

Inputs

Calculations

Input historical shares outstanding information

Note: This schedule is commonly integrated with the Equity Schedule

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Shares Outstanding Schedule - Sample Financial Modeling E-Book Part 3 of 4

Referenced

Calculations

Calculate forecasted basic shares


Reference shares repurchased and new shares issued for options exercised

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Shares Outstanding Schedule - Sample Financial Modeling E-Book Part 3 of 4

Assumption

Calculate forecasted diluted shares


Calculate average basic shares Make reasonable assumptions of options exercised effects

Calculate average diluted shares

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Shares Outstanding Schedule - Sample Financial Modeling E-Book Part 3 of 4

Referenced to Shares Outstanding Schedule

Link up forecasted diluted weighted average shares outstanding to Income Statement

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Debt and Interest Financial Modeling E-Book Part 3 of 4


Income Statement interest expense/ income are incomplete at this stage

Balance Sheet cash and debt items are incomplete at this stage
Cash Flow Statement
Calculate cash flow from operating and investing activities Calculate cash flow from available financing activities Calculate ending cash balance

Link up with Balance Sheet

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The Cash Flow Statement Financial Modeling E-Book Part 3 of 4


Cash Flow from Operating Activities
Net Income Add: Non Cash Charges/ Incomes Add: Change in Working Capital

Cash Flow from Investing Activities


Capital Expenditures Add: Proceeds from Asset Sales Add: Additions to Intangibles

Add: Change in LT assets/ liabilities

Add: Business Acquisitions

Free Cash Flow Available for Financing Activities

Cash Flow from Financing Activities


Available Cash Flow is used for:
Repayment of Debt, payment of dividend, repurchase of equity, maintain higher cash balances

Cash flow deficit is funded by


Revolving debt, issuance of LT debt, issuance of equity, cash balances

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Change in Cash Schematic Diagram Financial Modeling E-Book Part 3 of 4


Cash Flow from Operating Activities

+
Cash Flow from Operating Activities Net Cash Flow

Add: Effects of Ex. Rates on Cash


Add: Previous years Cash Balance = Ending Cash Balance

Cash Flow from Operating Activities

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Cash Flow Statement - Sample Financial Modeling E-Book Part 3 of 4

Referenced from Income Statement

Calculations

Link up Net Income to the Cash Flow Statement Calculate Cash Flow from Operating and Investing activities Calculate Cash Flow Available for Financing Activities

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Cash Flow Statement - Sample Financial Modeling E-Book Part 3 of 4

Calculations

Calculate Cash Flow Available for Financing Activities and Net Change in Cash
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Cash Flow Statement - Sample Financial Modeling E-Book Part 3 of 4

Reference from BS

Reference beginning cash balance from the Balance Sheet


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Cash Flow Statement - Sample Financial Modeling E-Book Part 3 of 4

Excel reads blank cells as Zero

Forecasted Cash is yet to be linked this will be done later in the model

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Cash Flow Statement - Sample Financial Modeling E-Book Part 3 of 4

Calculations

Calculate Ending Cash Balance


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Cash Flow Statement - Sample Financial Modeling E-Book Part 3 of 4

Referenced from Cash Flow

Link up ending cash balance to the Balance Sheet

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Illustrative Flow of Funds Financial Modeling E-Book Part 3 of 4


Linking up the Core Statements

Depreciation Sales

COGS

Income Statement Shareholders Equity Cash Flow Statement

Working Capital
Amortization

Change in WC

Working Capital

Amortization

PP & E, Depreciation

Balance Sheet

Other Long Term Items

Intangibles, Amortization

Intangibles

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Financial Modeling E-Book Part 3 of 4

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