Financial modeling - Fundamentals Part 2

Using a real company forecast model, we start the session by reviewing the structure and key components of an integrated three statement forecast model. We then focus on modeling operating cash (required cash) and separating it from excess cash. We then teach participants how to build a forecast cash flow statement from scratch, using income statement and balance sheet inputs. The last part of this session focuses on interest calculations and circularities, where we teach participants the difference between using beginning, ending or average debt/cash balances and how to work safely and effectively with or without circular formulae in a model This session can be taken as a stand-alone module, or as a follow-up to the Part 1 session.

Financial modeling - Cash sweep

In this session we build a three statement operating model for a real company, which incorporates a detailed revenue forecast based on price and volume drivers. We set up a hierarchy of a series of debt items and we learn how to model the sequential debt paydown using a ‘cash sweep’ approach. Best practice modeling techniques are emphasized throughout.

Financial modeling - From scratch

This session teaches participants how to build a three statement forecast model starting from a blank Excel spreadsheet. We begin by setting up a roadmap to guide us through the modelling process and then we proceed to build up a model template which we populate with historical financial information drawn from the case company’s financial statements. We analyse the company’s historical data by calculating financial ratios, which are then utilized as a basis to set the assumptions driving the financial forecasts. The full forecast model, comprising income statement, balance sheet and cash flow statement, is then built. As we build the model, we examine various forecasting techniques for the key elements of the financial statements. Once the model is complete, we test its integrity and we sanity-check the financial forecasts.

Valuation fundamentals

The session lays the foundations to build a solid understanding of corporate valuation in the context of investment banking. The most common valuation methodologies are introduced, explaining the difference between a company's fundamental value, and how much an acquirer would pay for the business. The concepts of enterprise value and equity value are explained, using simple but rigorous exercises. Finally, the basics of multiple valuation and discounted cash flow valuation are introduced. Exercises are used throughout the session.

Trading comparables

Participants are introduced to preparing multiples using real company data and a case study including a range of international companies. We focus on how to select comparables, where to find data in published financials and equity research reports, how to clean the raw data, and how to document and check the output. The most commonly used multiples are explained and complexities such as normalizing for non-recurring expenses / income are also covered. The session ends with practical exercises on the application of multiple analysis to value a company.

DCF Valuation

Participants learn how to build a discounted cash flow valuation model. The session starts with an overview of the valuation methodology, and the steps required in setting up a valuation model. We then focus on the calculation of free cash flow. A detailed ratio analysis is used to establish the reasonableness of the forecasts and to identify when the target company reaches steady state. We analyze the weighted average cost of capital, calculate terminal values, using both the exit multiple method and the perpetuity growth method. We discount the free cash flows to arrive at enterprise values and calculate the implied share price. Once the valuation is complete participants perform several checks on the analysis using key ratios, and sensitivity and scenario analysis.

LBO analysis fundamentals

Participants are introduced to the basic concepts underlying leveraged buyouts. The session starts by establishing why private equity firms can create value through leveraged buyouts and how the levered valuation fits into the valuation roadmap. Using a simple free cash flow forecast, participants establish how much a financial buyer could pay for the target company. Participants then build a simple LBO model.

Valuation issues

This session covers the more advanced areas of multiples and DCF valuation. Enterprise value and income statement adjustments are addressed for both DCF and multiples, using case company examples.