Financial Modeling intro

12/31/2014

How to make a financial model

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Purpose of analysis?
Background reading on company
Identify Key drivers (3 to 5)
Gather Data for other companies
Build analysis (make model in excel)
Present your conclusion
Data gathering
Start with interim and annual reports (eg. 10k report)
Google : [Company Name] investor relations
look for investor presentations
third party firms release data on industries and firm
search equity research on company normally issued by big banks
(you can see the banks view on the companies future) can also get
by signing up for a brokerage account scott trade, tdi (not always
needed)
can try interview management team to ask abou the future of the
company
channel check is talk to suppliers and customers about the company
you are interested in
Identifying the key drivers

Such as costs, prices, no. of units etc.

Gathering data on other companies

Building analysis

Revenue, expenses (always)

Create full or partial financial statements

Conclusion
What is your recommendation
Back up by no.s
Best structure/ timing
Powerpoint/oral

FINANCIAL MODELING IN REAL LIFE

Money depreciates (not because of depreciation)

NPV is a critical concept
NPV net present value
IRR internal rate of return
WACC weighted average cost of capital
WACC (discount rate) = normally 8 to 10%

Where to put your money?

Method 1: Intrinsic value vs Asking price
Method 2: Returns vs. opportunity cost
Discount rate: your opportunity cost
Can be equity or debt investors (main two)
Need to consider the opportunity cost for all investors called Weighted
average cost of capital (WACC)
Higher the risk, higher the discount rate (WACC) (higher potential
returns satisfy investors)

NPV Net Present Value

What payoff in the future is worth to us today
Intrinsic value: calculate the NPV of all future cash flows, using the discount
rate
Asking price < Intrinsic value (invest)

Asking Price > Intrinsic value (dont invest)

IRR Internal Rate of Return

Another type of discount rate , similar to WACC
Difference, You know WACC, but you SOLVE FOR the IRR
DEF: the discount rate at which the NPV is 0
Upfront investment + series of cash flows -> IRR
Series of cash flows + Discount rate (opp cost) -> Upfront investment (NPV)
Returns vs Opp cost (judging the investment)
Need to know the cash flows and asking price and the discount rate
IRR > WACC (invest)
IRR < WACC (dont invest)
When juding project by IRR judge on project target discount rate not on
whole company discount value

NPV: what a company/asset is worth TODAY

NPV: Givent he discount rate and cash flows, is it undervalued or
overvalued? What should the asking price be?
IRR: Will you earn more money than yu could elsewhere
IRR: Given asking price, should we invest?
Valuation: NPV (more common); Acquisition/Buyouts: IRR (more
common)