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Module 06 Financial modelling

Equity Edge

                   Discounted Cash flow Approach

Time Value of Money: The time value of money (TVM) is the concept that money available at the present time is worth more than the identical sum in the future due to its potential earning capacity. This core principle of finance holds that provided money can earn interest, any amount of money is worth more the sooner it is received. TVM is also sometimes referred to as present discounted value.

Forecasting Techniques: There are four main types of forecasting methods that financial analysts use to predict future revenues, expenses, and capital costs for a business. While there are a wide range of frequently used quantitative budget forecasting tools, in this article we focus on the top four methods: straight-line, moving average, simple linear regression, and multiple linear regression.

Revenue Builders: Business sell products or services in order to generate revenue. Business can also generate money through licensing (which can be thought of as selling their name or their brand as a product), through investments, and other means, but selling products and/or services is the most common method. In this segment we learn about various on how company increases their revenues.

Building the asset and depreciation schedule: Fixed Asset Schedule. The Fixed Asset Schedule defines all of the types of equipment, software, and other tangible property that the Company needs to acquire. It defines the cost of these items and calculates the quantities purchased over time and the resulting cash outflow and depreciation charges. A depreciation schedule is required in financial modeling to forecast the value of a company’s fixed assets (balance sheet), depreciation expense (income statement) and capital expenditures (cash flow statement).

Building P&L & Balance sheet: The profit and loss (P&L) statement is a financial statement that summarizes the revenues, costs and expenses incurred during a specified period, usually a fiscal quarter or year. These records provide information about a company’s ability or inability to generate profit by increasing revenue, reducing costs or both. A balance sheet is a financial statement that reports a company’s assets, liabilities and shareholders’ equity at a specific point in time, and provides a basis for computing rates of return and evaluating its capital structure.

Building Assumptions & Debt schedule: The first step in building our debt schedule is to enter assumptions related to the characteristics of any debt and preferred stock financing. These assumptions include interest rates, conversion prices for convertible securities, and scheduled amortization for debt requiring periodic repayment of principal.

Understanding FCFF, FCFI: Free cash flow to the firm (FCFF) is the cash available to pay investors after a company pays its costs of doing business, invests in short-term assets like inventory, and invests in long-term assets like property, plants and equipment.

Building Capex Schedule: A capital expenditure (“CapEx” for short) is the payment with either cash or credit to purchase goods or services that are capitalized on the balance sheet. To put it another way, it is any expenditure that is capitalized (i.e., not expensed directly on a company’s income statement) and is considered to be an investment by a company in expanding its business.

Decoding Ke, Kd&Kp with WACC: The weighted average cost of capital (WACC) definition is the overall cost of capital for all funding sources in a company. … A company can raise its money from the following three sources: equity, debt, and preferred stock. The total cost of capital is defined as the weighted average of each of these costs

CAPM and its understanding: The Capital Asset Pricing Model (CAPM) describes the relationship between systematic risk and expected return for assets, particularly stocks. CAPM is widely used throughout finance for pricing risky securities and generating expected returns for assets given the risk of those assets and cost of capital

EV/EBITDA & SOTP: Earnings before interest, tax, depreciation and amortization (EBITDA) is a measure of a company’s operating performance. Essentially, it’s a way to evaluate a company’s performance without having to factor in financing decisions, accounting decisions or tax environments. The sum-of-the-parts valuation (SOTP) is a process of valuing a company by determining what its aggregate divisions would be worth if they were spun off or acquired by another company. The equity value is then derived by adjusting the company’s net debt and other non-operating assets and expenses.

Module 06 Financial modelling

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