Financial Modeling and Valuation Study Guide of Midterm
Financial Modeling and Valuation Study Guide of Midterm BU.230.620.W4.SP16
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This 4 page Study Guide was uploaded by Kwan on Thursday March 31, 2016. The Study Guide belongs to BU.230.620.W4.SP16 at Johns Hopkins University taught by Dr. Ken Yook in Spring 2016. Since its upload, it has received 190 views. For similar materials see Financial Modeling and Valuation in Finance at Johns Hopkins University.
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Date Created: 03/31/16
MIDTERM 1. CHAPTER 1 This chapter aims to give you some finance basics and their Excel implementa tion. If you have had a good introductory course in finance, this chapter is 1 likely to be at best a refresher. This chapter covers: • Net present value (NPV)• Internal rate of return (IRR)• Payment schedules and loan tables• Future value• Pension and accumulation problems• Continuously compounded interest• Timedated cash flows (Excel functions XNPV and XIRR) Almost all financial problems are centered on finding the value today of a series of cash receipts over time. The cash receipts (or cash flows, as we will call them) may be certain or uncertain. The present value of a cash flow CF t anticipated to be received at time t is t. The numerator of this1r t expression is usually understood to be the expected time t cash flow, and the discount rate r in the denominator is adjusted for the riskiness of this expected cash flow—the higher the risk, the higher the discount rate. The basic concept in present value calculations is the concept of opportunity cost. Opportunity cost is the return which would be required of an investment to make it a viable alternative to other, similar investments. In the financial literature there are many synonyms for opportunity cost, among them: discount rate, cost of capital, and interest rate. When applied to risky cash flows, we will sometimes call the opportunity cost the riskadjusted discount rate (RADR) or the weighted average cost of capital (WACC). It goes without saying that this discount rate should be riskadjusted, and much of the standard finance literature discusses how to do this. As illustrated below, when we calculate the net present value, we use the investment’s opportunity cost as a discount rate. When we calculate the internal rate of return, we compare the calculated return to the investment’s opportunity cost to judge its value. 2. CHAPTER 31 Data table commands are powerful commands that make it possible to do complex sensitivity analyses. Excel offers the opportunity to build a table in which only one variable is changed, or one in which two variables are changed. Excel data tables are array functions, and thus change dynamically when related spreadsheet cells are changed. In this chapter you will learn how to build both onedimensional and two dimensional Excel data tables. 3. CHAPTER 33 Excel contains several hundred functions. This chapter surveys only those functions used in this book. The functions discussed are the following: • Financial functions: NPV, IRR, PV, PMT, XIRR, and XNPV• Date functions: Now, Today, Date, Weekday, Month, Datedif• Statistical functions: Average, Var, Varp, Stdev, Stdevp, Correl, Covar • Regression functions: Slope, Intercept, Rsq, Linest• Conditional functions: If, VLookup, HLookup• Large, Rank, Percentile, Percentrank• Count, CountA, CountIf • Offset A separate chapter, Chapter 34, is devoted to the important topic of array functions. 4. CHAPTER 35 This chapter covers a grab bag of Excel hints dealing with problems and needs that we sometimes run into. The chapter makes no pretence at uniformity or extensiveness of coverage. Topics covered include: • Fast fills and copy• Graph titles that change when data changes • Creating multiline cells (useful for putting line breaks in cells and linked graph titles) • Typing Greek symbols• Typing sub and superscripts (but not both)• Naming cells• Hiding cells• Formula auditing• Writing on multiple spreadsheets• Using Excel’s personal notebook to copy and paste and format quickly 5. CHAPTER 5 The usefulness of financial statement projections for corporate financial man agement is undisputed. Such projections, termed pro forma financial state 2 ments, are the bread and butter for much corporate financial analysis. In this and the next chapter we will focus on the use of pro formas for valuing the firm and its component securities, but pro formas also form the basis for many credit analyses; by examining pro forma financial statements we can predict how much financing a firm will need in future years. We can play the usual “what if” games of simulation models, and we can use pro formas to ask what strains on the firm may be caused by changes in financial and sales parameters. In this chapter we present a variety of financial models. All the models are sales driven, in that they assume that many of the balance sheet and income statement items are directly or indirectly related to sales. The mathematical structure of solving the models involves finding the solution to a set of simul taneous linear equations predicting both the balance sheets and the income statements for the coming years. However, the user of a spreadsheet need never worry about the solution of the model; the fact that spreadsheets can solve—by iteration—the financial relations of the model means that we only have to worry about correctly stating the relevant accounting relations in our Excel model. 6. CHAPTER 2 What Is Corporate Valuation About? When we discuss the valuation of a company, we may be referring to any of the following: • Enterprise value: Valuing the company’s productive activities. • Equity: Valuing the shares of a company, whether for the purpose of buying or selling a single share or valuing all of the equity for purposes of a corporate acquisition. • Debt: Valuing the company’s debt. When debt is risky, its value depends on the value of the company that has issued the debt. • Other: We may want to value other securities related to the company—for example, the firm’s warrants or options, employee stock options, etc. 7. CHAPTER 4 Although both Chapter 4 (this chapter) and Chapter 5 differ in their method for deriving the free cash flows to be discounted, both chapters boil down to the following template: 3 The difference between the two DCF approaches is in the derivation of the future FCFs. In this chapter we examine the firm’s consolidated statement of cash flows (CSCFs) and use it as a basis for estimating the future FCFs. We then discuss issues related to estimating the shortterm growth rate (8% above), the longterm growth rate (5%), assuming that you have learned from Chapter 3 how to compute the weighted average cost of capital (WACC) (11% above). We focus on a number of important technical issues: • Adjustments that need to be made in the passage from the consolidated statement of cash flows (CSCFs) to the free cash flow (FCF). These adjust ments involve: ▯ Financing adjustments ▯ Corrections for the vagaries of accounting rules ▯ Eliminating nonforwardlooking items • Dates that don’t match. Quite often the dates are not evenly spaced. We may be, for example, projecting from annual statements that end on 31 December, but the current valuation date may be September. How do we make our valu ation appropriate to this? The answer is to use XNPV, as we shall see. • Estimating the return on assets versus the return on equity. XIRR can provide us with the answer. Finally, we discuss the methodology for making reality fit our template (or is it vice versa? Sometimes it’s hard to tell!). 4
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