Week One Modelling Exam

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Week One Modelling Exam

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modeling

• Excel sheet shortcut keys

• Dividend Discount Model (DDM Model)

• Free Cash Flow to the Equity (FCFE)

• Free Cash Flow to the Firm (FCFF)

• Return on Capital (ROC)

• Return on Investments (ROI)

• Reinvestment Rate

• The specific usage of each model, purposes and their limitations

Outline CAFM® Principles

• Net Present Value (NPV)

• Internal Rate of Return (IRR)

• Multiple Internal Rate of Return (MIRR)

• Payback period

• Discounted Payback

• Loan Schedule and the PMT function

• Continuous Compounding

• Discounting using dated cash flows (XIRR and XNPV)

• Enterprise Value (EV)

Outline CAFM® Principles

• Estimating Betas

• CAPM (Cost of Equity)

• Expected returns using different approaches

• Cost of Debt

• WACC analysis-Optimal Capital Structure

• Gordon Dividend Model-Supernormal growth (two stages and three

stages supernormal growth) and constant growth

• Case: Titan Cements Valuation

Keyboard Navigation Only on Ms Excel! CAFM® Principles

-Limited Use of the Mouse!

navigate the spreadsheet with minimal usage of the mouse.

beginner, yet you should make sure that by the end of the program

you’ll be able to navigate the spreadsheet with limited usage of the

mouse.

Main Excel Shortcuts! CAFM® Principles

There are about 150 Excel shortcut keys that is embedded in Excel

(We will let you have access for all the shortcut keys on Excel!), yet

you should be familiar with the most important ones that all

professional financial modelers are expected to know and use!

(Note: Shortcut Keys change slightly depending on the Excel version you’re using)

Shortcut Keys Definition

Press “Ctrl” + “↓” Goes Down the cells

Press “Ctrl” + “↑” Goes Up the cells

Press “Ctrl” + “→” Goes to the last used cell to the Right

Press “Ctrl” + “←” Goes to the last used cell to the Left

Press “Ctrl” + “G” Enters a specific reference cell

Press “Ctrl” + “Home” Goes to the Top of the page

Press “Ctrl” + “End” Goes to the down right of the page

Main Excel Shortcuts! CAFM® Principles

Press “Ctrl” + “Page Up” / “Page Navigates between sheets

Down”

Press “Ctrl” + “Shift” + “Backspace’’ Selects the whole data very quickly

Press “Shift” + “Space” Selects an entire row

Press “Ctrl” + “Space” Selects an entire column

Press “Ctrl” + “Shift” + “+” Insert

Press “Ctrl” + “-“ Deletes a row or a column

Press “Ctrl” + “Tab” Switches between opened workbooks

Press “Alt” + “Tab” Switches between applications

Press “Ctrl” + “X” Cut

Press “Ctrl” + “R” Copies the left cell to the right one

Main Excel Shortcuts! CAFM® Principles

Press “Ctrl” + “D” Copies the upper cell to the down one

Press “Ctrl” + “B” Bold

Press “Ctrl” + “I” Italic

Press “Ctrl” + “U” Underlined

Press “Ctrl” + “1” To Format cells

Press “Alt” + “H” or “N” or Switches between home screen tabs

“P” or “M” or “A” or “R” or i.e : Home (H), Insert (N), Page layout (P), Formulas

“W” (M), Data (A), Review (R), View (W)

Press “Fn” + “F2” Edits formula of the existing cell

Press “Fn” + “F4” Locks the cell with dollar sign

i.e. : $F$4

*Press another time “F4”: will lead to fix only the row.

*Press another time “F4”: will lead to fix only the

column.

Main Excel Shortcuts! CAFM® Principles

Press “Alt” + “=” Brings you to the sum function

Press “Shift” + “F3” Brings you to the excel function wizard

Press “Ctrl” + “ ` ” Views all the excel formulas in the

spreadsheet

Press “Ctrl” + “ ` ” again Returns to the normal view

Press “Shift” + “F10” Access the right click of the mouse

Press “Ctrl” + “F3” Name a cell

Practicing! CAFM® Principles

The only way you can learn to develop good financial models is by

practicing a lot.

The primary objectives of this program are to show you how to learn

and practice financial modeling the right way and to provide you with a

wide range of real world financial models.

Importance of Financial Modeling CAFM® Principles

students.

Applications (VBA), are the preferred tools for the job.

integrated subject in program certificates.

Importance of Financial Modeling CAFM® Principles

trial and error approaches to modeling and end up with models that are

not sufficiently flexible powerful, and dynamic.

assumption cell, should dynamically impact the full model with no manual

adjustments.

Prior Knowledge CAFM® Principles

finance, mathematics, Excel and VBA- using modeling skills.

basic knowledge.

Prior Knowledge CAFM® Principles

In Excel, we assume that you know the basics, and we’ll cover the

advanced features of Excel that you need for modeling in detail.

VBA will be one of the important languages you will learn from this

program. We assume that you know nothing about it!

VBA is a powerful and very useful tool that is already embedded in your

MS Excel.

Prior Knowledge CAFM® Principles

Very few people use VBA in modeling because they are afraid of

learning “programming”.

We will teach you VBA and modeling with VBA using a simple class-

tested approach.

The key is to learn VBA as a language the same way you learned your

mother tongue

You will be surprised to find out how little you have to learn to be able to

develop models with VBA that are often more useful, powerful, and

flexible than Excel models.

Prior Knowledge CAFM® Principles

Finally, we assume that you are new to modeling. Even if you have

some experience, you will quickly find yourself challenged as you build

on your skills.

You will learn by imitating and practicing on numerous models from all

areas of finance, and you will be able to challenge yourself further by

developing extensions to these models.

A Financial Model is a Statistical Tool CAFM® Principles

• In developing a financial model, the basic thing you are doing is

summarizing a complex set of technical and economic factors into a

number (such as value per share, IRR or debt service coverage).

central to statistics -- in assessing value, credit analysis, corporate

strategy and other business functions, you must use some sort of

forecast.

worse, is fundamentally dishonest because uncertain unanticipated

events such as the internet growth, high oil prices, sub-prime

crisis, falling dollar continually occur.

concept cannot be quantified, it is a philosophy. The fundamental

notion of statistics is presenting and summarizing information, this is

the same as a financial.

Danger of Believing too Much in Models CAFM® Principles

• Alan Greenspan, Financial Times.

– “The essential problem is that our models – both risk models and

econometric models – as complex as they have become – are still too

simple to capture the full array of governing variables that drive global

economic reality. A model, of necessity, is an abstraction from the full

detail of the real world.”

• Naseem Taleb:

– In the not too distant past, say the pre-computer days, projections

remained vague and qualitative, one had to make a mental effort to

keep track of them, and it was a strain to push scenarios into the future.

It took pencils, erasers, reams of paper, and huge wastebaskets to

engage in the activity. The activity of projecting, in short, was

effortful, undesirable, and marred with self doubt.

– But things changed with the intrusion of the spreadsheet. When you

put an Excel spreadsheet into computer literate hands, you get

projections effortlessly extending ad infinitum. We have become

excessively bureaucratic planners thanks to these potent computer

programs given to those who are incapable of handling their

knowledge.

Steps in Creating A Model CAFM® Principles

Whether you are creating a financial model using Excel or VBA, you must

take a systematic approach. A systematic approach always involves

planning ahead and this takes some time.

Step 2: Define the Input and Output Variables of the Model

Step 3: Decide Who Will Use the Model and How Often (A model that will

be used frequently should be designed differently)

Step 4: Understand the Financial and Mathematical Aspects of the Model

Step 5: Design the Model

Step 6: Create the Spreadsheets or Write the VBA Codes

Step 7: Test the Model

Step 8: Protect the Model (Don’t bother to protect a VBA model because

most users do not even know how to open them!)

Step 9: Document your Model (Diagrams, Flowcharts, assumptions, how it ‘s

structured)

Step 10: Update the Model as Necessary

Rules To Remember CAFM® Principles

When you start your financial model there are a few rules

you need to remember to build a working model

A model should identify key industry and business drivers and model around them. These key business

and financial drivers should ultimately reconcile with a company’s overall vision and strategic actions.

Avoid modeling around potential drivers that represent averages in themselves. Break them down into

inputs and let the output represent the weighted average. This is one of the most significant modeling flaws

often leading to wrong outputs.

Try to understand how each driver is likely to behave during the forecast period, e.g., some costs (e.g.,

variable) will behave as a % of sales while others (e.g., fixed) are likely to move more along inflation.

Make sure your model has plenty of cross-checks to ensure that (1) assumptions make sense and (2) your

model is built properly.

A model should be dynamic, i.e., any change to any assumption cell should dynamically impact the full

model. Beware: there should be no manual adjustment whatsoever.

Ideally, every cell should represent either a single assumption input (A1 = 10) or a formulaic output linking

only cells together, i.e., A11 = A1+A10. This is particularly important to build dynamic models that are also

easy to audit.

LOOKUP Functions CAFM® Principles

LOOKUP (Vector Form)-We are covering those functions because you are likely

to use in financial modeling

value from the same position in a second one-row or one-column range. (This is

called the vector form of LOOKUP).

LOOKUP(lookup_value,lookup_vector,result_vector)

Lookup_value: is the value that LOOKUP searches for in the first vector- it can be a

number, text, a logical value, or a name or reference that refers to a value.

Lookup_vector: is a range that contains only one row or one column-The values in

it can be text ( A..Z), or numbers(-1,0,1), or logical values (True, False).

Result_vector: is a range that contains only one row or column. It must be the

same size as lookup_vector

LOOKUP Functions CAFM® Principles

If LOOKUP cannot find the lookup_value It matches the largest value in the

lookup_vector that is less than the lookup_value. This make it possible to lookup

values where the lookup_value falls in range instead of matching a specific value.

If the lookup_value is smaller than the smallest value in the lookup_vector

LOOKUP gives the #N/A error value

For example: The tax table in the following figure provides information for

calculating taxes for a single filer given his/her taxable income. In the table, the

marginal tax rate is 10% and the base tax amount is $0 for taxable income up to

$8,025. For income between $8,025 and $32,550 they are 15% and

$802.50, respectively; and so on.

Here is how you will use the LOOKUP function to look up the marginal tax rate and

the results you will get for various taxable incomes.

=LOOKUP(55000,D9:D14, H9:H14) will return 25%

=LOOKUP(400000,D9:D14, H9:H14) will return 35%

HLOOKUP and VLOOKUP Functions CAFM® Principles

HLOOKUP and VLOOKUP are parallel functions that work the same way- They

are known as the array form.

HLOOKUP: Searches for a value in the top row of a table or an array (range) of

values and then returns the value from a specified row in the same column of the

table or array.

VLOOKUP: Searches for a value in the left most column of table or array (range)

and then returns a value from a specified column in the same row of the table or

array.

Use HLOOKUP when your comparison values are located in a row across the top

of a table of data, and you want to look down a specified number of rows.

Use VLOOKUP when your comparison values are located in a column of the left of

the data you want to find.

HLOOKUP and VLOOKUP Functions CAFM® Principles

HLOOKUP (lookup_value,table_array,row_index_num,range_lookup)

*Lookup_value can be a value, a reference, or a text string.

to a range or a range name. The values in the first row of table_array can be

text, numbers, or logical values.

If range_lookup is TRUE, then the values in the first row of table_array must be

placed in ascending order.

value will be returned. A row_index_num of 1 returns the first row value in

table_array, a row_index_num of 2 returns the second row value in table_array,

and so on.

HLOOKUP and VLOOKUP Functions CAFM® Principles

Range_lookup: is a logical value that specifies whether you want HLOOKUP

to find an exact match or an approximate match. If TRUE or omitted, an approximate

match is returned.

In other words, if an exact match is not found, the largest value that is less than

lookup_value is returned.

If FALSE, HLOOKUP will look for an exact match. If one is not found, the error

value #N/A! is returned. This argument is optional, and if omitted is assumed to be

TRUE.

For example:

=VLOOKUP(63000,D9:H14,3) will return $14,260

=VLOOKUP(140000,D9:H14,3,FALSE) will return #N/A!(no exact match).

=VLOOKUP(140000,D9:H14,2,TRUE) will return 36%

OFFSET Function CAFM® Principles

OFFSET: Returns the reference to a single cell or a range of cells that is specified

number of rows and columns from a cell or range of cells.

=OFFSET(base_reference,rows,columns,height,width)

Base_reference: is the reference to the base cell or range from which the resulting

reference is to be calculated.

Rows: is the number by which the row number of the resulting reference is to be

offset from that of the base_reference.

Columns: Work in the same way.

Heights and Width: specifies the number of rows and columns to be included in

the resulting reference

PV and NPV Function CAFM® Principles

Both concepts, present value and net present value, are related to the value today

of a set of future anticipated cash flows.

Present Value (PV): is used if you need to discount all cash flows expected future

cash flows ( Use if Cash Flows are equal).

=PV(rate,nper,pmt,[FV],[type]) Type 0 (Default) : Payment done at end of

each period.

Type 1: Payment done at the beginning of

each period

Net Present Value (NPV): is used to net expected cash flows to its value today (

i.e: Expected revenues –initial investment), Use if Cash Flows are NOT equal.

=NPV(rate,value1…valuen)

PV and NPV Function CAFM® Principles

periods Example on Excel spreadsheet

PMT Function CAFM® Principles

PMT: Calculates the loan payment based on constant payments and constant

discount rate

=PMT(rate,nper,pv,[fv],[type])

Loan Schedule:

MIRR and Data Tables CAFM® Principles

Graphical Presentation

If the investment cash flows include several negative cash flows (i.e.: several

investment inflows), then if you compute the IRR, this might mislead your investment

decision because such an investment might have Multiple Internal Rates of Return

(MIRR).

If we graph the NPV ( Y-axis) and the discount rate on (X-axis) and the NPV graph

crosses the x-axis twice Then we have Two different IRRMIRR

5.00

Two IRRs

0.00

Net present value 0% 10% 20% 30% 40%

-5.00

-10.00

-20.00

-25.00

Excel’s IRR function allows us to add an extra argument that will help us find both

IRRs.

Note: The Guess should be any number between 0 and 0.5

MIRR and Data Tables CAFM® Principles

Graphical Presentation

If the NPV graph crosses the X-axis (i.e.: Discount rate axis) one time There is

only one IRR

NPV of Bond Cash Flows

1200

1000

800

600

NPV

400

200

0

-200 0% 5% 10% 15% 20%

-400

Discount rate

To be able to graph the NPV, you should learn how to construct a data table

sensitivity analyses. Excel offers the opportunity in which only one variable is

changed, or one in which two variables are changed.

XNPV and XIRR Functions CAFM® Principles

The XNPV and XIRR functions can be used if the cash flows are occurring not

on fixed periodic intervals ( i.e.: not semiannual, or annual).

They allow us to do computations on cash flows which occur on specific dates

that need not to be even intervals.

XNPV and XIRR Functions CAFM® Principles

XIRR: The function [puts annualized return. It works by computing the daily IRR

and annualizing it, XIRR=(1+DailyIRR)^365 -1

=XIRR(values,data,[guess])

XNPV: Computes the net present Value of a series of cash flows occurring on

specific dates

=XNPV(rate,values,data)

Gordon Model and Cost of Equity CAFM® Principles

Gordon Model: The value of a share is the present value of the future

anticipated dividend stream from the share, where the future anticipated

dividends are discounted at the appropriate risk-adjusted cost of equity, Re

Gordon Model:

Gordon Model and Cost of Equity CAFM® Principles

Using the Gordon Model you can calculate the implied cost of equity the market

is using.

Dividends, Repurchase of stocks, and stock issuance), then you can get a second

implied value for the cost of equity.

Gordon Model and Cost of Equity- CAFM® Principles

Supernormal Growth

equity, Re, for companies whose historical equity payout data overstate any

anticipation of future growth rates.

The Growth rate (g) should not be greater than the cost of equity (Re), or else

the Gordon Model wouldn’t work.

This will yield us to divide the company growth into phases (Phase one:

Supernormal Growth where g>Re, and Phase Two: Where g is expected to remain

constant and lower than the cost of equity till perpetuity.

Beta, β CAFM® Principles

comparison to the market as a whole. Beta is used in the capital asset pricing model

(CAPM), a model that calculates the expected return of an asset based on its beta and

expected market returns

Beta is calculated using regression analysis, and you can think of beta as the

tendency of a security's returns to respond to swings in the market.

A beta of 1 indicates that the security's price will move with the market.

A beta of less than 1 means that the security will be less volatile than the market.

A beta of greater than 1 indicates that the security's price will be more volatile than

the market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile

than the market.

Many utilities stocks have a beta of less than 1. Conversely, most high-tech, Nasdaq-

based stocks have a beta of greater than 1, offering the possibility of a higher rate of

return, but also posing more risk.

Beta, β Modeling CAFM® Principles

If you would like to calculate the β of a stock, you should:

1- Get at least a 5 year historical price of the stock (The prices could be monthly prices).

2-Rearrange the prices from oldest to newest.

3-Calcualte the returns of the stock by: (Pe-Pi/Pi).

4-Decide to which benchmark index you would like the stock to be compared.

5-Get at least 5 year historical prices of the benchmark index

6-Rearrange the prices of the index from oldest to newest

7-Calculate the returns of the index by: (Pe-Pi/Pi)-Some modelers use ln(Pe/Pi)

8-Get the Slope between Returns of the stock (Y-axis) and the Return of the Benchmark(X-

axis)

8-Calculate the Covariance of the returns between the stock and the benchmark

9-Calculate the Variance of the returns of the benchmark

rb: Returns of the benchmark

CAPM, Cost of Equity Modeling CAFM® Principles

To calculate the Cost of equity using the Capital Asset Pricing Model.

2-Risk-Free rate

3-Beta, β

4-Tax-rate-If you would like to calculate the Tax-adjusted CAPM

Arbitrage Pricing Theory-APT CAFM® Principles

assumes an asset's return is dependent on various macroeconomic, market

and security specific factors.

The APT along with the CAPM is one of two influential theories on asset

pricing. The APT differs from the CAPM in that it is less restrictive in its

assumptions.

E(r j ) = r f + β j1RP1 + β j2RP2 + β j3RP3 + β j4RP4 + ... + β jn RPn

The factors or the Betas can be:

1-Industrial Production

2-CPI

3-Oil Price

4-Many others that you think could effect the asset price…etc

Cost of Debt CAFM® Principles

The rate applied to determine the cost of debt (Rd) should be the current market

rate the company is paying on its debt.

If the company is not paying market rates, an appropriate market rate payable by

the company should be estimated.

The estimated value could be computed from:

1-The most recent issued debt by the company (Figure our the yield of this debt)

2-If you don’t have access neither to the current market borrowing rate specified for

the company nor the yield of the most recent issued debt, you should use your

common sense in such a situation.

Because companies benefit from the tax deductions available on interest paid, the

net cost of the debt is actually the interest paid less the tax savings resulting from the

tax-deductible interest payment.

Cost of Debt CAFM® Principles

Because companies benefit from the tax deductions available on interest paid, the

net cost of the debt is actually the interest paid less the tax savings resulting from the

tax-deductible interest payment.

Weighted Average Cost of Capital CAFM® Principles

2-Preferred stock calculation

3-Bonds and any other long-term debt

All else equal, the WACC of a firm increases as the beta and rate of return on

equity increases, as an increase in WACC notes a decrease in valuation and a

higher risk.

The WACC equation is the cost of each capital component multiplied by its

proportional weight and then summing:

Weighted Average Cost of Capital CAFM® Principles

preferred Stocks) refer to the weights of market values of equity, debt, and

preferred stocks.

practitioners add it to debt

Note (2) : We will cover unlevered beta, levered beta, Country

Risk Premium, Default Spreads, and the advanced calculation

of WACC during our advanced valuation models

The Excel Spreadsheet embeds: Basic WACC

Calculations and Advanced one ( The

advanced WACC calculation may be

complicated but not difficult)

Basic Concepts for Valuation Models CAFM® Principles

There are many discounting methods. All of them give the same results when we

use the

proper cash flows and the appropriate discounting rate. Fair value cannot be

dependent on a model.

1. FCFF - free cash flows to the firm: The most traditional method, in which operating

and investment cash flows are discounted using WACC

2. FCFE - free cash flows to equity: In which cash flows are discounted using cost of

equity

3. CCFF - capital cash flows the firm: In which capital cash flows (CCFE = FCFE +

CFD, CFD-cash flows to debt) are discounted using weighted average cost of capital

before tax

4. CCFE - capital cash flows to equity: In which capital cash flows (CCFE = FCFF-

CFD, CFD-cash flows to debt) are discounted using adjusted cost of equity before tax

5. EVAF - incremental economic value added to the firm: In which economic cash

flows to the firm are discounted using WACC

Basic Concepts for Valuation Models CAFM® Principles

flows to

equity are discounted using cost of equity

7. ECFF - economic cash flows to the firm: In which economic cash flows against

initial book value of equity and debt are discounted using WACC

8. ECFE - economic cash flows to equity: In which economic cash flows against

initial book value of equity are discounted using cost of equity

9. BRAF - business risk adjusted free cash flows to the firm: In which cash flows

are

discounted using unlevered cost of capital

10.BRAE - business risk adjusted free cash flows to equity: In which cash flows

are

discounted using unlevered cost of capital

Basic Concepts for Valuation Models CAFM® Principles

11. RFAF - risk-free-rate adjusted free cash flows to the firm: In which cash flows

are

discounted using risk-free interest rate

12. RFAE - risk-free-rate adjusted free cash flows to equity: In which cash flows

are

discounted using risk-free interest rate

13. APVF - adjusted present value: In which cash flows to the firm are discounted

using

unlevered cost of capital

14. APVE - adjusted present value: In which cash flows to equity are discounted

using

unlevered cost of capital

15.FEVA - financial and economic value added: Which decomposes cash flows into

various

streams, and discounts them with unlevered cost of capital

Basic Concepts for Valuation Models CAFM® Principles

16. DDM - dividend discount models: In which dividends and cash surpluses are discounted

using cost of equity

17. Decomposition method: In which operating, investment, tax shield cash and differences

between equity cost of capital and external cost of capital flows are discounted using cost

of equity.

The Value of an Enterprise Assets (Va) = Value of debt (Vd) + Value of Equity (Ve)

2-Value the company’s equity

3-Sum part (1) and part (2)

Note: Despite varying world all 17 discounting methods give the same values of the firm

and equity.

Dividend Discount Model-DDM CAFM® Principles

•Ultimately, growth rate must equal that of the economy as a whole.

•Assume growth at a rapid rate for n periods followed by steady growth

D0( 1 + g1 ) Dn( 1 + g c )

t

n 1

P0 = ∑ +

t =1 ( 1 + Re ) Re -g ( 1 + Re )

t n

dividends discounted separately cost of equity to the Present

at cost of equity Value

FCFE and FCFF CAFM® Principles

What could shareholders be paid?

Capital – Capital Expend. – Debt Repayments + Debt Issuance –

Preferred Dividends + New Preferred Stock Issued

What cash is available before any financing considerations?

Working Capital – Capital Expend – Change in PV of OL

Multiples in Relative Valuation CAFM® Principles

Relative Valuation: (Easy and widely used, yet you shouldn’t use it blindly!)

To do relative valuation:

these assets.

2. Convert these market values into standardized values, since the

absolute prices cannot be compared This process of standardizing

creates price multiples.

3. Compare the standardized value or multiple for the asset being

analyzed to the standardized values for comparable asset, controlling

for any differences between the firms that might affect the multiple, to

judge whether the asset is under or overvalued.

Multiples in Relative Valuation CAFM® Principles

earnings, cashflows, book value or revenues.

1- Earnings Multiples

– Value/EBIT

– Value/EBITDA

--Value/Cash Flow

– Price/Book Value(of Equity) (PBV)

– Value/ Book Value of Assets

3- Revenues

– Price/Sales per Share (PS)

– Value/Sales

Multiples in Relative Valuation CAFM® Principles

Relative Valuation:

When comparing and using multiples, estimated by someone else, it is

critical that we understand how the multiples have been estimated.

- Too many people who use a multiple have no idea what its cross

sectional distribution is. If you do not know what the cross sectional

distribution of a multiple is, it is difficult to look at a number and pass

judgment on whether it is too high or low.

Multiples in Relative Valuation CAFM® Principles

3- Analyze the multiple

- It is critical that we understand the fundamentals that drive each

multiple, and the nature of the relationship between the multiple and

each variable.

more difficult in practice than it is in theory.

You Should ask yourself the following every time you are using a

multiple for Relative Valuation:

-Both the value (the numerator) and the standardizing variable ( the

denominator) should be to the same claimholders in the firm. In other

words, the value of equity should be divided by equity earnings or equity

book value, and firm value should be divided by firm earnings or book

value.

CAFM® Principles

rate)] + Current R&D – Amortization of R&D– (Capex - Depreciation – OL

Depreciation + M&A) – Change in NCWC – Change in PV of OL

Adjusted EBIT(Old EBIT + OL Rental Exp – Dep. Of OL)

Dividends + New Preferred Stock issued + New Debt issued – Debt

Repayments

Note: Tax rate should be the effective tax rate. In most cases the

marginal tax rate is approximately equal to the effective tax

rate.

Books References CAFM® Principles

1. Aswath Damodaran (2001), The dark side of valuation: Valuing

young, distressed, and complex Businesses( 2nd ed.) ,FT Press.

2. Alastair L. Day (2012), Mastering financial modeling in Microsoft excel(3rd ed.), FT

Publishing.

3. Simon Benninga (2008), Financial modeling (3rd ed.) MIT Press.

4. Chandan Sengupta (2010), Financial analysis and modeling( 2nd ed.), Wiley Finance.

5. Masari, M., & Gianfrate, G. (2014). The valuation of financial companies: Tools and

techniques to value banks, insurance companies, and other financial institutions (1st

ed.). Wiley Finance.

6. Koller, T., & Goedhart, M. (2010). Valuation: Measuring and managing the value of

companies (5th ed.). Hoboken, N.J.: John Wiley & Sons.

7. Kieso, D., Weygandt, J., & Warfield, T. (2014). Intermediate accounting (15th ed.).

Wiley John, & Sons, Incorporated

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