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Limited preview of IMS Proschool’s “Handbook of Financial Modeling”.

This handbook prepares you for NSE India Financial Modeling Certification.
For more information visit: www.proschoolonline.com

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Financial Modeling Session - 1

Financial Modeling
Introduction

This section briefly describes financial modeling and its application. The section will help you to get an overall perspective on how building this skill can help different finance professionals.

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What is a Financial Model?
• It is a representation for numerical flow of any financial data.

• It is a decision making and planning tool for finance professionals. • It is performed with the help of a spreadsheet or some dedicated financial software.
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Who makes financial models and why?
Various finance professionals It is widely used in financial decision making and planning who use financial modeling are: processes to answer • Bankers questions such as:
• Is the stock undervalued or overvalued? • Whether to make investment in the project or not?

• Investment Bankers • Project Finance professionals • Equity Researchers

• Should loan be given for a
project or not? What is the rating of the project or company?
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• Financial Planning
Advisors • PE & VCs • Hedge Funds
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What does a model look like?
• A models can be very basic , perhaps a single excel sheet OR • It can be 30-40 sheets or even multiple workbooks with several macros and can be fairly detailed and complex. • It largely depends on the end use that you have in mind. • If used for internal analysis it may remain a simple Excel worksheet or the final output may be a well done report.

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hence the model should be flexible enough to incorporate any level of changes. Ltd.Attributes of Good Models • Realistic – Assumptions used in the model should be realistic to get realistic output else a common saying prevalent among financial modeling professionals is “Garbage in. • Error-Free – Many financial decisions are based on models. Copyright© . • Flexible – Changes are inevitable. • Easy to use – The model should make it easy for a user to understand the movement of figures. • Easy to understand – Should not be a one man’s language.IMS Proschool Pvt. Garbage out”. hence it should be error free for non- erroneous decision. 7 .

.Ltd.Proschool Pvt.Prerequisites for Learning Financial Modeling • Knowledge of MS Excel • Basics of Economics • Accounting Fundamentals • Financial Management • Knowledge of Financial Market 8 Copyright© . Copyright© . Ltd.IMSIMS Proschool Pvt.

for obvious reasons.2 Financial Modeling Handling Spreadsheets As you may have noticed. Ltd. This sections covers key functions and utilities within Excel that are critical for building financial models. financial models are created in spreadsheets generally in Microsoft Excel though it could be in open office or other spreadsheets. It is highly recommended that you attempt and practice the exercises in this section and not just read through them.IMS Proschool Pvt.Financial Modeling Session . So learning to handle spreadsheets is a preliminary requirement for financial modeling. . Copyright© .

Copyright© .Financial Modeling KEY EXCEL FUNCTIONS THIS SECTIONS WALKS YOU THROUGH IMPORTANT EXCEL FUNCTIONS THAT ARE FREQUENTLY USED IN FINANCIAL MODELING. ITS IMPORTANT TO TRY THESE OUT IN EXCEL. Ltd. .IMS Proschool Pvt.

Excel Functions What are Excel Functions ? Excel Functions are built-in formulas based on predefined logic that makes it easy to calculate the output for a given data. 11 Copyright© . • Within the ‘Formulas’ tab click ‘Insert Function’. How to insert a Function? • Click ‘Formulas’ tab in Excel. . • Desired function type can be selected from the drop down list.IMS Proschool Pvt. Ltd. • The dialog box shown on the right would appear on the screen.

• Insert the numbers to be added in the text box of the sum dialog box. 12 .Excel Functions-Example Find the total sales of the following particulars using excel: How to insert a Function? • Click ‘Formulas’ tab in Excel.IMS Proschool Pvt. • In the dialog box select ‘Sum’ function. Ltd. Particulars Sales Iron Rods 105288 Iron Gurders 452278 Steel Sheets 265887 Iron Plates 248566 Total 1072019 Copyright© . • Within the ‘Formulas’ tab click ‘Insert Function’.

IMS Proschool Pvt. Copyright© . 13 . Ltd.Excel Functions-Example Find the total sales of the following particulars using excel: Insert the cell references whose numbers is to be added.

Excel Functions Excel Functions – Functions types used in Financial Modeling Financial Date & Timing Text Excel Functions Statistical Logical Math & Trig Lookup & Reference 14 Copyright© .IMS Proschool Pvt. Ltd. .

Excel Functions Commonly used Functions in Financial Modeling o Lookup & References  Choose  Offset  Lookup  VLookup  HLookup  Match o Sum  Sum  Sumif  Sumifs  Sumproduct  Average  Averageifs o Count  Count  Countif  Countifs  Counta  CountBlank o Dates  Year  Month  Day  Date  Date360  Edate o If statement & its alternative  If  And  Or  Max  Min o Financial  PV  FV  PMT  Rate  NPER  IPMT Copyright© . Ltd.IMS Proschool Pvt. 15 .

16 . Ltd.IMS Proschool Pvt.Excel Functions Lookup and References Copyright© .

Ltd.IMS Proschool Pvt.Excel Functions Sum functions Copyright© . 17 .

Excel Functions Count functions Copyright© . 18 .IMS Proschool Pvt. Ltd.

Ltd.Excel Functions If statement and its Alternatives Copyright© . 19 .IMS Proschool Pvt.

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C2.1.1) Understanding of formula: In column B.C2:C5) Understanding of formula: 2nd figure from C2 from the range C3:C5.Excel Functions CHOOSE Function: Find the sales of the particular .1.IMS Proschool Pvt. Copyright© . Ltd. OFFSET Function: Find the sales of the fourth particular: Formula: =OFFSET(B1. get the value of particular in 4th row and 1 column from B.4. 21 .Iron Rods: Formula: =CHOOSE(2.

B2:B5. 22 .Excel Functions Lookup Function: Find the sales of the Steel Sheets: Formula: =LOOKUP("Steel Sheets". and returns the value from column C that's in the same row (265887). Match Function: Find the sales less than 150000: Formula: =MATCH(150000.1) Understanding of formula: In column C. Ltd.C2:C5) Understanding of formula: Looks up Steel Sheets in column B.IMS Proschool Pvt. get the row whose value is less than 150000. Output: 1 Copyright© .C2:C5.

from the range of particulars and sales. for Iron Plates.B1:C5. Copyright© .2.Excel Functions HLookup Function: Find the sales value of the fifth row: Formula: =HLOOKUP(C1.5. Ltd.B1:C5.FALSE) Understanding of formula: Looks up Sales value of Iron Plates in column C.e. VLookup Function: Find the sales values of Iron Plates: Formula: =VLOOKUP(B5.IMS Proschool Pvt. 23 .FALSE) Understanding of formula: Looks for the sales value of fifth row i.

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nper.type) Find the amount to be invested every year to get an amount of 6105.IMS Proschool Pvt.10 PMT Function: PMT(rate.-B2.B4.fv.nper. risk free rate is 10% and time is 5 years: Formula: =FV(B3.0.105.0.pv.-B2.0) Output: 1000 Copyright© .0) Output: 6.type) Find the FV of insurance premium paid where premium is 1000.pmt.B4.pv. 25 .10 at the end of 5 years and risk free rate is 10%: Formula: =PMT(B3. Ltd.Excel Functions FV Function: FV(rate.

IMS Proschool Pvt.0.0.pv.-B4.Excel Functions NPER Function: NPER(rate. type) Find the number of years of investment to get 6105. pv. fv.10: Formula: =RATE(B3.0.pmt.10 by making a payment of 1000 annually and risk free rate is 10%: Formula: =NPER(B3. pmt. Ltd.B2.-B4.fv.B2. 26 .type.guess) Find the investment rate at which 1000 invested annually for 5 years would yield 6105.0) Output: 10% Copyright© .0) Output: 5 RATE Function: RATE(nper.

YOU ARE LIKELY TO ENCOUNTER SOME OF THESE ERRORS WITH REASONABLE REGULARITY. . UNDERSTANDING HOW TO CORRECT THESE MAY BE THE DIFFERENCE BETWEEN GOING HOME BEFORE OR AFTER MIDNIGHT. Ltd. Copyright© .IMS Proschool Pvt.Financial Modeling ERRORS IN EXCEL FORMULA BUILDING HOWEVER EXPERT YOU MAY BE WITH EXCEL.

28 .IMS Proschool Pvt. Ltd.Errors in Excel formula building Errors in Excel Formatting Division by Zero Reference Error Syntactical Numeric Circular Reference ###### #Div/0! #Ref! #Name? #Null! #Num! Logical mistake Copyright© .

Ltd. Rectification: (Either of them) o Increase the width of column o Change the number format that suits the column width. Dates and times in Excel must be positive values. Copyright© . o There is a negative number in the cell that has been formatted for dates or times.IMS Proschool Pvt. 29 . o The formula in the cell produces a result that is too wide for the cell.Errors in Excel formula building Error Type: Formatting Error ( ####) Cause: o This type of error occurs in a situation where the width of a column is not wide enough to show the data of a cell completely.

Rectification: o Divisor can be changed to a non-zero number. Copyright© . Ltd.IMS Proschool Pvt. o Cell reference can be changed.Errors in Excel formula building Error Type: Division by zero (#DIV/0!) Cause: This type of error occurs when a non-zero number is divided by zero. 30 . o Use a combination of IF statement and the ISERROR formula or IFERROR formula in 2007 excel.

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IMS Proschool Pvt. Ltd. ONE SHOULD BE ABLE TO CHECK DATA VERACITY. . FEW EXCEL FUNCTIONS INCORPORATE POWER OF ITERATIONS. Copyright© .Financial Modeling DATA VALIDATION AND ITERATION AS ANALYSTS ARE BOMBARDED WITH A LOT OFF DATA. APPLICATION OF THESE CAN SIGNIFICANTLY IMPROVE THE TASKS ONE CAN DO IN EXCEL. THIS IS WHERE THE DATA VALIDATION FUNCTIONS COME IN HANDY.

o Select a cell.Data Validation It prevents invalid data entry in a worksheet. Ltd. o Validation rule can selected from the list. o Go to Data tab. Copyright© . 33 . o Validation tool can be selected from drop down list. Data Tools group and click Data Validation.IMS Proschool Pvt. o On selecting the Data Validation from the drop down list. the dialog box named ‘Data Validation’ appears on the screen.

Account Employee Costs 110 Payroll 120 IRS/FICA/Wk comp/State/SDI 140 Retirement Plan 125 Commissions/Bonuses Subtotal Subcontractors & Services 201 Telecommunication Services 254 Advertising Subtotal Total Actual 45328 15997 6249 2720 70294 637 40 677 70971 Projected 60000 25000 8000 4500 97500 700 700 98200 o Select a cell.Data Validation-Example In the data furnished below. there is a limitation while projecting the ‘Commission/Bonuses’. o Select Data Validation from the list.IMS Proschool Pvt. Ltd. handle the situation with Data Validation. Fill the requirements in the dialog box. Data Tools group and click Data Validation. It should be whole number and should not be greater than 5000. Copyright© . 34 . o Go to Input Message tab and enter some message. o Go to Data tab.

o Go to Input Message tab and enter some message.Data Validation-Example o Select a cell. o Select Data Validation from the list. o Go to Data tab. Ltd. Fill the requirements in the dialog box. Copyright© .IMS Proschool Pvt. Data Tools group and click Data Validation. 35 .

o Select Goal Seek from the list. Copyright© . Ltd. This can be used when you know the outcome of a formula but don’t know one input in the formula. It helps a user to see the effect on one item in the formula on the other. 36 . Data Tools group and click What-if Analysis.Iteration Functions – Goal Seek Goal Seek works on the terms of cause and effect scenarios.IMS Proschool Pvt. Location of Goal Seek o Go to Data tab.

To Value. Copyright© . o By changing cell should be the cell reference that changes to bring the desired output. Ltd.IMS Proschool Pvt.Iteration Functions – Goal Seek o On selecting Goal Seek.e. a dialog box similar to one shown in right appears on the screen. o Follow the example for better understanding. 37 . o In Set cell box we have to fill cell whose value we know and value of the cell has to filled in next box i.

-B2.0. 38 .Goal Seek-Exercise Calculate the EMI to be paid on a loan of Rs. Formula: =PMT(B3. Ltd.IMS Proschool Pvt.0) Copyright© .B5.1200 @ 2%/month for 6 months.

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Goal Seek-Exercise Final Outcome of the exercise. Ltd. Note: End of Period balance becomes zero. .IMS Proschool Pvt. 40 Copyright© .

a dialog box similar to one shown in right appears on the screen.Iteration Functions – Scenario Manager A scenario is a named combination of values that is assigned to one or more variable cells in a what-if model.IMS Proschool Pvt. Location of Scenario Manager o Go to Data tab. o On selecting Scenario Manager. 41 . o Follow the Example for better understanding Copyright© . o Select Scenario Manager from the list. Ltd. Scenarios to forecast the outcome of a worksheet model. Data Tools group and click What-if Analysis.

Ltd. 42 .Exercise The exercise is to see the effect of changes in Retail Price.IMS Proschool Pvt.Scenario . COGS and/or Unit Seles Growth Factor on the profit of the company. Copyright© .

o In Changing cells box. Copyright© .IMS Proschool Pvt. o Press Ok. 43 . Ltd. o In the Add Scenario dialog box (Shown in image). B3:B3.Scenario Manager-Exercise Steps: o Click Add button on the dialog. fill any Scenario name.B10. write.

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45 Copyright© . Row input cell (=N8) 2. Column input cell (=10) 3. . Press OK button. the Gross profit is 345. Final Output of Data Table: Check: For Revenue % Growth of 15% and Cost Margin of 70%. Ltd.Data Table – Exercise Steps: 1.IMS Proschool Pvt.

IMS Proschool Pvt. 46 .Data Summarization – Pivot Table It is a data summarization tool. Ltd. o On selecting Pivot Table. Location of Pivot Table o Go to Insert tab. a dialog box similar to one shown in right appears on the screen. It makes easier to arrange and summarize complex data for better analysis. o Follow the Example for better understanding Copyright© . Tables group and click Pivot Table. o Select PivotTable from the list.

Pivot Table . 47 .Exercise Prepare Pivot Table for the analysis of the following data: Copyright© . Ltd.IMS Proschool Pvt.

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Pivot Table . 49 .Exercise Steps: 6. Ltd. Copyright© . Gives the following output in the Pivot Area as shown below. 7.IMS Proschool Pvt. Drag and drop the field from list to areas as shown in the image in the right.

50 .IMS Proschool Pvt. The final output of the pivot table which shows the year wise sale of products geographically.Exercise Steps: 8.Pivot Table . Color can be changed as per requirement. Ltd. Copyright© .