class notes

FINANCIAL MODELING

BUSI 584

Mustafa N. Gltekin

Fall 2014

Introduction

Course Overview

Review of the Schedule

Overview of Financial Modeling

Next Class:

Financial Modeling:

Preliminaries

Research Tools & Resources

Introduction to Capital Market Lab Resources

Web based sources

Agenda August 20, 2014

Financial Modeling Gltekin - 2

Instructor: Mustafa N. Gltekin

Office: McColl 4112

[email protected]

962-3153 962-2068 fax

Executive in

Residence: Debra Drumheller

[email protected]

Office hours: MW 1:30-12:30 and by Appointment

Classroom: McColl Capital Markets Lab


Overview

This is a finance course

Not a course on Excel

Proficiency in spreadsheet use is necessary

Main focus is on financial decision making under uncertainty by the Management

Outsiders Consultants

Investors

This is a demanding course!


Course Objectives

Develop skills in designing & building financial model

of a company

Ultimate goal is help & guidance in decision making

Financial planning & forecasting

Valuation & evaluation of firm performance

Risk management


Course Objectives

Developing long-lasting skills in building financial models

Ability to recognize hidden assumptions of models build by others

Integrating skills learned so far

Valuation!


Who should take this course?

If you aspire to pursue an investment banking career

If you want to be a powerful security analyst

If you want to pursue consulting career

If you want to be an entrepreneur

And, if you want to excel in other finance courses


Evaluation

Assignments (20%).

Case briefs

Reports should not be more than 2 pages. You may include your supporting documents in an appendix

Reasonable margins (~1) & fonts (10-12) please!

Assignments will be graded on a scale of 0 (unacceptable) to 10 (excellent)

You may work in groups

Up to five members per team

You may be a member of a different team for each assignment


Evaluations - continued

Take-home Exams (45%)

Based on a simplified real world case

Part I (15%) : Building the model

Objective: Apply Financial Modeling skills learned in a controlled environment

Part II (30%): Full model with Valuation & Recommendations (Sensitivity Analysis or Monte Carlo

Simulations is a bonus)

Objective: To master Financial Modeling & Valuation


Evaluation - continued Term-Project (25%) (Details will be posted on Canvas)

Best way to immerse yourself in Financial Modeling

Best way to learn is by doing

Kenan-Flagler Financial Modelers (KFFM).

You will be an analyst in KFFM and build a financial model for a client

I will function as the research department

If you aspire for the A

Valuation of a company

Build an Integrated Valuation Model

Buy side analysts perspective with a detailed model and sell side analysts polished report

Consultants perspective -

Objective: Master every aspect of Financial Modeling! Detailed requirements & deadlines for each step will be posted as we progress

Do not underestimate time requirements! It is not something you can do it in a week!


Evaluations - Continued

Peer Evaluations & Class Participation (10%)

Basis of allocating points for group work & recognizing student contribution to class

Bloomberg Certification (5%)

You must successfully complete two sections

Schedule regular meetings with me

To get detailed and timely feedback on your work

Its best to review the materials in small groups!


Computer Usage Policy in Class

No laptops during the regular class sessions except during hands-on sessions

You do not need to have a computer or access to a computer during the class

It is distracting

No cellphones!


Course Materials: Software & Data

Microsoft Excel

Make sure that Analysis ToolPak & Report Manager are active

FactSet, Bloomberg, & resources available in CML

Optional:

Decision Tools Suite

@RISK

BestFist

RiskView

Precision Tree

Crystal Ball


Course Materials & Teaching Notes

Course Site on Canvas All class materials & notes will be posted here

Check before each class for posted notes & print them if you would like to add your own notes

Dropbox It is a depository for cases & readings

Materials that cannot be posted on Canvas will be posted here

Invitation to join the Dropbox will be send to emails posted on Connect Carolina unless you specify an

alternative email


Reference Text Books

VALUATION: Measuring and Managing the Value of Companies, 5th Edition by T. Koller and M. Goedhart, and D. Wessels (John Wiley, 2010).

FINANCIAL MODELING: Using Excel and VBA, C. Sengupta, (Wiley, 2004)

FINANCIAL MODELING, 2nd Edition by S. Benninga, (MIT Press, 2001)

CORPORATE FINANCE, by R. Ross, R. Westerfield, and J. Jaffe, (McGraw-Hill).

BEST PRACTICES FOR EQUITY RESEARCH ANALSYSTS, by J.J. Valentine (McGraw-Hill, 2011)

INTERNATIONAL FINANCIAL STATEMENT ANALYSIS, T. Robinson, H. Van Greuning, E. Henry, and M. Broihanh, (Wiley, 2008)


If You Want to be an Excel Wizard

Books by John Walkenbach

Excel 20xx Bible

Excel 20xx Power Programming with VBA

Many Free-bees at his web site http://www.j-walk.com/

Books by Stephen Bullen & his Company Web site:

http://www.oaltd.co.uk


Schedule Subject to change. Consult class notes for readings & assignments SESSIONS TOPICS

2-7 Resources Available for Research

Review of Resources & Programs in Capital Market Lab (CML)

Web based sources via UNC

Financial Statement Modeling - Preliminaries

Best Excel Practices

Financial Statement Analysis I

Introduction to Integrated Financial Statement Modeling


Schedule - continued

SESSIONS TOPICS

7-19 II. FINANCIAL MODELING

Preparing Pro-forma Financial Statements & Schedules

Core Statements

Working Capital

Depreciation & Amortization Schedules

Equity & Debt Schedules

Cash Flow Statements

Sensitivity Analysis

Scenario Analysis

Decision Tables

Financial Modeling under Uncertainty

Monte Carlo Simulations

Financial Statement Analysis II

Estimating Future Performance


Schedule - continued

SESSIONS TOPICS

20-28 III. VALUATION THEORY & APPLICATIONS

Capital Structure & Valuation

Valuation Theory & Rates of Return

Adjusted Present Value (APV) Method

Estimating Discount Rates

Alternative Methods of Estimating Terminal Value

Simple Growth Models

Multistage Growth Models

Relative Valuation

LBO Valuation

Introduction to Real Options

Real World Applications

Integrated Financial Model and Valuation of a Publicly Traded Company

Term Project Presentations


What is a financial model?

Virtual re-creation of the actual business where:

All the decisions and outcomes are quantified and reflected in financial statements

Performance is measured

Facilitates financial analysis


Financial Modeling

Different types of models serve different purposes and users

Model is based on historical performance and assumptions about future performance

Model will project financial statements to the level of detail tailored for your purpose

Future performance derived from model is analyzed in different ways by different parties

It is critical to understand what purpose your model ultimately intents to serve


Purpose of the model

Equity Research Focus on future performance in terms of its implications on the

companys stock price

Credit Research Focus on companys financial health (ability to service debt, cash

flow, credit statistics,..)

Investment Banking Earnings projections represent the core of most valuation analysis Intrinsic value valuation methods incorporate forward earnings/cash

flow projections

Merger consequences analysis incorporates forward projections Accretion/dilution earnings impact of an acquisition

Projections allow bankers to determine financial flexibility Ability to make an acquisition through excess cash or raising more debt,

issuing equity etc.

Credit bankers focus on ability to pay down debt, companys financial risk, using forward credit metrics


Benefits of Modeling

Building a good model requires a combination of various skills

Accounting

Corporate Finance

Industry knowledge

Company knowledge

Excel

In the process of building a model you learn more about what you dont know!


Types of Models

Discrete

Continuous

Prescriptive (Determining an optimal

policy)

Descriptive (Describe relationship &

provide information for

evaluation)

Deterministic Closed form solutions exists

Spreadsheets &

Sensitivity Analysis

Probabilistic Closed form solutions may be

possible

Spreadsheets (limited) &

Simulation Models


Simulation Is the process of building a mathematical or logical

model of a system or a decision problem, and experimenting with the model to obtain insights into the systems behavior or to assist in solving the decision problem

Why use simulations? Problem does not meet the assumptions required by

analytical modeling approaches

Interactions of variables are too complex to be analytically tractable

Monte Carlo Simulation: A sampling experiment to estimate the distribution of an

outcome variable that depends on several probabilistic input variables


class notes

Documents

financial modeling skills

financial decision

financial modeling busi

building financial model

financial modeling best

financial models ability

gltekin office

course objectives