PROJECT REPORT

ON
“FINANCIAL MODELLING – BCOM (H) 308”
SUBMITTED IN PARTIAL FULFILLMENT FOR
THE AWARD OF THE DEGREE OF
BACHELOR OF COMMERCE (H)
(2016-2019)
UNDER THE GUIDANCE OF
MRS. ANU GOEL
SUBMITTED BY:
DIPESH
43016788816
6th SEMESTER, B.COM (H)

SIRIFORT INSTITUTE OF MANAGEMENT STUDIES

(AFFILIATED TO GURU GOBIND SINGH INDRAPRASTHA UNIVERSITY)
Plot Number 8, Institutional Area, Sector 25, Rohini, New Delhi, Delhi 11008

1
 INDEX
S.NO. TOPIC PG. NO.
01) Student undertaking and certificate 3-4

02) Introduction to excel and commands 5-11

03) Basic excel functions

12-
04) Average functions

05) Count

06) Concatenate function

07) If function

08) Tables

09) Inserting charts

10) Conditional formatting

11) Filter

12) Sorting

13) Pivot table and pivot chart

14) Introduction to financial modelling

2
 STUDENT UNDERTAKING

This is to certify that I have completed the Project titled “FINANCIAL

MODELLING AND SPREADSHEETS” under the guidance of
“MRS. ANU GOEL” in partial fulfilment of the requirement for the
award of degree of Bachelor of Commerce (H) at Sirifort Institute Of
Management Studies, New Delhi. This is an original piece of work and
has not been submitted elsewhere.

STUDENT SIGNATURE :

STUDENT NAME : DIPESH

3
 CERTIFICATE

This is to certify that the Project titled “FINANCIAL MODELLING”

is an academic work done by “DIPESH” submitted in the partial
fulfilment of the requirement for the award of the Degree of Course
from Sirifort Institute Of Management Studies. It has been completed
under the guidance of MRS. ANU GOEL. The authenticity of the
project work will be examined by the viva examiner which includes data
verification, authenticity of information etc. and it may be rejected due
to non fulfilment of quality standards set by the Institute.

Signature of the Faculty Guide

4
 Introduction to Excel

MS-Excel 2000 is a Windows based application package. It is quite useful in entering, editing,
analysis and storing of data. Arithmetic operations with numerical data such as addition,
subtraction, multiplication and division can also be done with Excel. You can sort the
numbers/characters according to some given criteria (like ascending, descending etc.)and solve
simple financial, mathematical and statistical formulas.

Excel is a spreadsheet, a grid made from columns and rows. It is a software program that can
make number manipulation easy and somewhat painless. The nice thing about using a computer
and spreadsheet is that you can experiment with numbers without having to RE-DO all the
calculations.

EXCEL FEATURES

There are a number of features that are available in Excel to make your task easier. Some of the
main features are:

AutoFormat - lets you to choose many preset table formatting options.

1. AutoSum - helps you to add the contents of a cluster of adjacent cells.

2. List AutoFill - automatically extends cell formatting when a new item is added to the end of a
list.

3. AutoFill - feature allows you to quickly fill cells with repetitive or sequential data such as
chronological dates or numbers, and repeated text. AutoFill can also be used to copy functions.
You can also alter text and numbers with this feature.

4. AutoShapes toolbar will allow you to draw a number of geometrical shapes, arrows, flowchart
elements, stars and more. With these shapes you can draw your own graphs.

5. Wizard - guides you to work effectively while you work by displaying various helpful tips
and techniques based on what you are doing.

5
Drag and Drop - feature will help you to reposition the data and text by simply dragging the data
with the help of mouse.

6. Charts - features will help you in presenting a graphical representation of your data in the form
of Pie, Bar, Line charts and more.

7. PivotTable - flips and sums data in seconds and allows you to perform data analysis and
generating reports like periodic financial statements, statistical reports, etc. You can also analyse
complex data relationships graphically.

EXCEL WORKSHEET

Excel allows you to create worksheets much like paper ledgers that can perform automatic
calculations. Each Excel file is a workbook that can hold many worksheets. The worksheet is
agrid of columns (designated by letters) and rows (designated bynumbers). The letters and
numbers of the columns and rows (called labels) are displayed in gray buttons across the top and
left side of the worksheet. The intersection of a column and am row is called a cell. Each cell on
the spread sheet has a cell address that is the column letter and the row number. Cells can contain
either text, numbers, or mathematical formulas.

6
Basics of a Spreadsheet

Spreadsheets are made up of :

Columns

COLUMN is defined as the vertical space that is going up and down the window. Letters are
used to designate each COLUMN'S location.

COLUMN labeled D is highlighted.

7
Rows

ROW is defined as the horizontal space that is going across the window. Numbers are used to
designate each ROW'S location.

ROW labeled 4 is highlighted.

CELL

A CELL is the space where a row and column intersect. Each CELL is assigned a name
according to its COLUMN letter and ROW number.

In the above diagram the CELL labeled C2 is highlighted.

8
COMMANDS

S.N CATEGO FUNCTION DESCRIPTION SYNTAX

O. RY
1 Math & ABS Returns the absolute value =ABS(number)
Trig of a number
2 Math & PRODUCT Multiplies its arguments =PRODUCT(number1,num
Trig ber2,….)
3 Math & RAND Returns a random number =RAND()
Trig between 0 and 1
4 Math & RANDBETW Returns a random number =RANDBETWEEN(bottom
Trig EEN between the numbers you ,top)
specify
5 Math & ROUND Rounds a number to a =ROUND(number,num_dig
Trig specified number of digits its)
6 Math & ROUNDDO Rounds a number down, =ROUNDDOWN(number,n
Trig WN towards zero um_digits)
7 Math & ROUNDUP Rounds a number up, away =ROUNDUP(number,num_
Trig from zero digits)
8 Math & SUBTOTAL Returns a subtotal in a list =SUBTOTAL(function_nu
Trig or database m,ref1,…..)
9 Math & SUM Adds its arguments =SUM(number1,number2,
Trig …..)
10 Math & SUMIF Adds the cells specified by a =SUMIF(range,criteria,[su
Trig given criteria m_range])
11 Math & SUMIFS Adds the cells in a range =SUMIFS(sum_range,criter
Trig that meet multiple criteria ia_range,criteria,….)

12 Math & SUMPRODU Returns the sum of the =SUMPRODUCT(array1,ar

Trig CT products of corresponding ray2,[array3],…..)
array components

9
13 STATISTI AVERAGE Returns the average of its =AVERAGE(number1,num
CAL arguments ber2,….)
14 STATISTI AVERAGEIF Returns the average =AVERAGEIF(range,criteri
CAL (arithmetic mean) of all the a,[average_range])
cells in a range that meet a
given criteria
15 STATISTI COUNT Counts how many numbers =COUNT(value1,value2,….
CAL are in the list of arguments )
16 STATISTI COUNTA Counts how many values =COUNTA(value1,value2,
CAL are in the list of arguments ….)
17 STATISTI COUNTBLA Counts the number of blank =COUNTBLANK(range)
CAL NK cells within a range
18 STATISTI COUNTIF Counts the number of cells =COUNTIF(range,criteria)
CAL within a range that meet the
given criteria
19 STATISTI COUNTIFS Counts the number of cells =COUNTIFS(criteria_range
CAL within a range that meet ,criteria,…..)
multiple criteria
20 STATISTI MAX Returns the maximum value =MAX(number1,number2,
CAL in a list of arguments …..)
21 STATISTI MEDIAN Returns the median of the =MEDIAN(number1,numbe
CAL given numbers r2,…..)
22 STATISTI MIN Returns the minimum value =MIN(number1,number2,…
CAL in a list of arguments …)
23 TEXT CONCATEN Joins several text items into =CONCATENATE(text1,te
ATE one text item. Easier to use xt2,….)
‘&’ instead of the function
usually.
24 TEXT EXACT Checks to see if two text =EXACT(text1,text2)
values are identical
25 TEXT FIND Finds one text value within =FIND(find_text,within_tex

10
 another (case-sensitive) t,start_num)
26 TEXT LEFT Returns the leftmost =LEFT(text,num_chars)
characters from a text value
27 TEXT LEN Returns the number of =LEN(text)
characters in a text string
28 TEXT LOWER Converts text to lowercase =LOWER(text)
29 TEXT MID Returns a specific number =MID(text,start_num,num_
of characters from a text chars)
string starting at the position
you specify
30 TEXT PROPER Capitalizes the first letter in =PROPER(text)
each word of a text value
31 TEXT REPLACE Replaces characters within =REPLACE(old_text,start_
text. num,num_chars,new_text)
32 TEXT RIGHT Returns the rightmost =RIGHT(text,num_chars)
characters from a text value
33 TEXT SEARCH Finds one text value within =SEARCH(find_text,within
another (not case-sensitive) _text,start_num)
34 TEXT TEXT Formats a number and =TEXT(value,format_text)
converts it to text
35 TEXT TRIM Removes space from text =TRIM(text)

11
BASIC EXCEL FUNCTIONS

ADDITION,SUBTRACTION,MULTIPLICATION,DIVISION

Path:- apply the formula

Addition: =A2+B2

Subtraction: =A2-B2

Multiplication: =A2*B2

Division: =A2/B2

12
AVERAGE FUNCTION

AIM

Returns the average (arithmetic mean) of the arguments. For example, if the range
D1:D20 contains numbers, the formula =AVERAGE(D1:D20) returns the average
of those numbers.

SYNTAX

AVERAGE(number1, [number2], ...)

RESULT

13
AUTO SUM (SUM)

Aim :- Whenever need to sum a single range of cells, whether a column, row or
several adjacent columns or rows, Excel AutoSum to automatically make an
appropriate SUM formula for you.

Path :- Select a cell next to the numbers you want to sum > Click
the AutoSum button on either the Home or Formulas tab.

14
Result :-

AUTO SUM (AVERAGE)

15
Aim :- provides the average value of the data.

Path :- select range of cell > home tab > autosum >average.

Result :-

16
COUNT

Aim: The Count function will return the number of entries (actually counts each
cell that contains NUMBER DATA) in the selected range of cells. Cell that are
blank or contain text will not be counted.

Syntax: =COUNT (A2:E9)

Result:

17
18
CONCATENATE FUNCTION
Aim :- The CONCATENATE function is used to join the contents of multiple cells. For
example, if you have a worksheet with first names in one column and last names in another
column, you can use the CONCATENATE function to join the first and last names into one
column. Where text is a text string, cell reference or formula-driven value.

path :-formulas tab > insert function > select CONCATENATE > click ok > text 1, text 2,.. etc..
data entry field > click ok.

The syntax of Excel CONCATENATE is as follows: =CONCATENATE (text1, text2, [text3],

...)

19
IF FUNCTION
Aim :- The ‘IF’ function is a logical function which basically means its results are based on one
of two outcomes: true or false.
The user sets the criteria by which the function evaluates whether it is indeed true or false.

Then the function allows us to dictate what it returns in either of those cases!

IF is a logical function that allows you to specify results based on whether or not a specific
criterion is met.

Path :- like any other function, the ‘IF’ function needs some input in order to work ptoperly.
These inputs we call ‘the syntax’.

=IF(logical_test,[value_if_true],[value_if_false])

20
 TABLES

Aim :- Aim: to present the data in an attractive view

Path :- select the range > insert tab > table > ok

21
INSERTING CHARTS
Aim:-To make the data more attractive, charts being created. It is very easy foe reader to grasp

the data through diagrammatic representation.

Path:-INSERT Tab > Charts group > Column > Insert a 2D or 3D chart.

Types of charts
Column charts
Line charts
Pie charts
Bar graphs
Area chart

COLUMN CHART

22
LINE CHART

PIE CHART

23
CONDITIONAL FORMATTING
Aim :- Conditional Formatting (CF) is a tool that allows you to apply formats to a cell or range
of cells, and have that formatting change depending on the value of the cell or the value of a
formula.

Path :- home > conditional formatting > select the category.

Result :-

24
FILTER
Aim :- to filter the data of a particular section.
Path :- select the data you wish to filter > home tab > filter > apply the condition.

Result :-

25
SORTING
Aim :- : to sort out the data according to user’s preference

Path :- select the area > home > sort > sort smallest to largest > ok

Result :-

26
PIVOT TABLE & PIVOT CHART
Aim:- pivot table are one of excel’s most powerful features. It allows us to extract the
significance from a large , detailed data set.

Path:- insert table > tables group >pivot table button .

Aim: A pivot chart is the visual representation of a pivot table in Excel. Pivot charts and tables
are connected with each other.

Path:- insert tab > tables group >pivot table > pivot chart button

Result:

27
 INTRODUCTION TO FINANCIAL MODELLING

Meaning of Financial Modelling and Financial Model

Financial modeling is the process of creating a summary of a company's expenses and earnings
in the form of a spreadsheet that can be used to calculate the impact of a future event or
decision.A financial model has many uses for company executives. Financial analysts most often
use it to analyze and anticipate how a company's stock performance might be affected by future
events or executive decisions.

Financial modeling is a representation in numbers of some or all aspects of a company's

operations.Such models are intended to be used as decision-making tools. Company executives
might use them to estimate the costs and project the profits of a proposed new project. Financial
analysts use them to anticipate the impact of an economic policy change or any other event on a
company's stock.

A financial model is simply a tool that’s built in Excel to forecast a business’ financial
performance into the future. The forecast is typically based on the company’s historical
performance, assumptions about the future, and requires preparing an income statement, balance
sheet, cash flow statement and supporting schedules (known as a 3 statement model). From
there, more advanced types of models can be built such as discounted cash flow analysis (DCF
model), leveraged-buyout (LBO), mergers and acquisitions (M&A), and sensitivity analysis.

What is a financial model used for?

The output of a financial model is used for decision making and performing financial analysis,
whether inside or outside of the company. Inside a company, executives will use financial
models to make decisions about:

 Raising capital (debt and/or equity)

 Making acquisitions (businesses and/or assets)
 Growing the business organically (i.e. opening new stores, entering new markets, etc.)

28
  Selling or divesting assets and business units
 Budgeting and forecasting (planning for the years ahead)
 Capital allocation (priority of which projects to invest in)
 Valuing a business

Types of financial model

1. Three statements Model
It is a most basic set up for financial modelling the three statements that is income
statements, balance sheet and cash flows are all dynamically linked with formulation in
excel.
2. Discounted cash flow model
Discounted cash flow model takes the cash flow from three statement models and make
some adjustments that is necessary.

FEATURES OF A GOOD EXCEL MODEL

1. Realistic
2. Error free
3. Flexible
4. Easy to use
5. Easily understandable format
6. Judicious formatting

29
STEPS IN CREATING A FINANCIAL MODEL

Step 1 Understand the expected uses of the model and the required outputs.
Step 2 Collect historical data for the company, its industry and for its major competitors.
Step 3 Understand the company's plan and develop a comprehensive set of modelling
assumptions.
Step 4 Build a model and debug it.
Step 5 Improve the model based on feedback.

FORECASTING FINANCIAL STATEMENTS

1. QUANTITATIVE

a. Performa Financial Statements

Inthis we use sales figures and cost from previous two to three years after
excluding onetime cost. It is mainly used in case of mergers and acquisition as
well as in the case when a new company is forming and statements are needed to
collect capital from investor.

b. Time series forecasting

We try to identify the trend. To find out the trend we need data of mere previous
year. Example: 10 year or 15 year.

c. Cause effect method

Here the forecaster examines the cause and effect relationship of the variable with
other relevant variables like change in disposable income, interest rate, GDP,
unemployment etc.

30
1. QUALITATIVE

a. Executive Opinion
In this the expert opinion of key personnel of different departments like sales,
production, purchasing and operations are gathered to arrive at future predictions.

b. Reference class forecasting

In this we predict the outcome of the planned action based on similar scenario in
other places or times.

c. Delphi technique
A series of questionnaires are prepared and answered by a group of expert who
are keeping separate from each other. Once the result of each questionnaire was
compiled and second questionnaire is prepared and this process continues until a
narrow shortlisted of opinions is reached.

d. Sales force polling

In this method the essentials are derived based on the average of sales force
polling.

31
 FINANCIAL STATEMENT TECHNIQUES

1. HORIZONTAL ANALYSIS

Horizontal analysis compares financial information over time, typically from past quarters or
years. Horizontal analysis is performed by comparing financial data from a past statement, such
as the income statement. When comparing this past information one will want to look for
variations such as higher or lower earnings.

2. VERTICAL ANALYSIS

Vertical analysis is a percentage analysis of financial statements. Each line item listed in
the financial statement is listed as the percentage of another line item. For example, on an
income statement each line item will be listed as a percentage of gross sales. This
technique is also referred to as normalization or common-sizing.

3. RATIO ANALYSIS

Ratio analysis is an attempt of developing meaningful relationship between individual

items (or group of items) in the balance sheet or profit and loss account. Ratio analysis is
not only useful to internal parties of business concern but also useful to external parties.
Ratio analysis highlights the liquidity, solvency, profitability and capital gearing.

4. TREND ANALYSIS

The ratios of different items for various periods are find out and then compared under this
analysis. The analysis of the ratios over a period of years gives an idea of whether the
business concern is trending upward or downward. This analysis is otherwise called
as Pyramid Method.

32
5. REGRESSION ANALYSIS

Regression analysis is a powerful statisticalmethod that allows you to examine the

relationship between two or more variables of interest. While there are many types
of regression analysis, at their core they all examine the influence of one or more
independent variables on a dependent variable.

33
Financial Statement Modelling involves Three Financial Statements

Balance Sheet

Balance Sheet is a statement of the assets, liabilities, and capital of a business or other
organization at a particular point in time, detailing the balance of income and expenditure over
the preceding period.

Cashflows

Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a
business. At the most fundamental level, a company’s ability to create value for shareholders is
determined by its ability to generate positive cash flows, or more specifically, maximize long-
term free cash flow.

Income Statements

An income statement or profit and loss account is one of the financial statements of a company
and shows the company’s revenues and expenses during a particular period. It indicates how the
revenues are transformed into the net income or net profit.

34
MODEL 1

Modelling example 1 :

Historical income statement and balance sheet for Vitex limited for 1999 to 2002 are given.
In these statements identify all the numbers that should be calculated based on other numbers
and replace this number with the appropriate formulas. Reformat the statement to make
attractive.

Building the model

Step 1

Enter the formulas to calculate subtotal and totals. The function or the formula to be entered in
the income statement for the year 1999.

1. For calculate gross operating income

In B8 enter; =B6 - B7
2. To calculate EBIT in B13 enter; =B8-Sum(B10:B12)
3. To calculate pre-tax income in B17 enter; =B13-SUM(B15:B16)
4. To calculate net income in B20 enter; =B17-B19
5 To calculate addition to retained earnings in B 23 enter; =B20-B22.

35
For the balance sheet enter the following:

1. To calculate total current assets in B31 enter; =SUM(B27:B30)

2. To calculate net property, plant and equipment in B35 enter; =B33-B34
3. To calculate total non-current assets in B38 enter; =B35+B37
4.To calculate total assets in B40 enter; =B31+B38
5. To calculate total current liabilities in B46 enter; =SUM(B43:B45)
6. To calculate total liabilities in B51 enter; =B46+SUM(B48:B50)
7. To calculate total shareholders’ equity in B55 enter; =B53+B54
8. To calculate total liabilities and shareholders in B57 enter; =B51+B55

36
Step 2

Create formulas for other items.

Accumulated depreciation for a year should be calculated as depreciation for previous year +
depreciationfor current year from the income statement.
So in C34 enter; =B34+C11
Similarly retained earnings would be calculated in C54 using the formula =B54+C23

Step 3

Create the statement of cash flows in a new worksheet create the headings and labels for the cash
flow statement. It is important here to clearly indicate what a positive or negative number will
mean.

Example: Decrease increase in accounts receivable means a positive number indicates decrease
and negative number indicates increase.

37
In creating the formula we have to make sure that decrease come out as a positive number.
For net income in C7 enter equal to click on the tab for the worksheet IS and BS, click on C20
and press enter.
Similarly for depreciation expense in C38 enter and equal to sign click the tab for IS and BS
click C11 and press enter.
For accounting receivable select C9 enter and equal to sign.
Click the the tab for ISand BS click B28 insert a minus sign click C28.

38
Step 4

Create the formatted IS and BS to turn off the regular grid line select tools-options-view tab-
windows-deselect gridlines.

39
40
Model 2:Common size statement

Problem: Create a common size income statement and balance sheet for Vitex limited from the
historical statement for 1999 to 2002 and then calculate the four year averages for each line items
expressed as percentage of sales.

Step 1 Create the headings for common size statement.

Step 2 Create the formula for common size statement.
Step 3 Calculate the averages for all four years.

41
42
Statement of Cash Flows for Vitex Corp.

43
Ratio analysis

Ratio analysis is a quantitative method of gaining insight into a company's liquidity, operational
efficiency, and profitability by comparing information contained in its financial statements. Ratio
analysis is a cornerstone of fundamental analysis.

Outside analysts use several types of ratios to assess companies, while corporate insiders rely on
them less because of their access to more detailed operational data about a company.

44
45
 Various approaches to valuation

1. Cost approach
2. Market approach
3. Discounted cash flow (intrinsic value)

When valuing a business or assets, there are three broad categories that contain their own
methods. The cost approach looks at the cost to build something and is not frequently used by
finance professionals to value a company as going concern.

Market approach - This is a form of relative valuation and frequently used in the industry. It
includes comparable analysis and prudent transactions finally.
The discounted cash flow (DCF) is a form of intrinsic valuation and the most detailed through
approach to valuation model.

Public company comparable is also known as comparable approach per group analysis.

In this we compare the current value of business to the other similar business by looking at
trading multiples like PE ratio, EV: EBITDA ratio or other ratios. If the company trades at 10
times PE ratio.
Example: If company X trades at 10 times PE ratio and another company Y that we want to
value which has same attributes as company X having earnings of Rs. 2.50 per share the the
market value of company Y stock must be 10*2.5 =25

Precedent transactions: Precedent transactions are those where you compare the company in
question to other business that have recently being sold or acquired in the industry. They are
useful for merger and acquisition transactions but can easily become stale dated and the longer
reflective of the current market prices.
DCF - It is an intrinsic value approach where an analyst forecasts the business's free cash flow
into the future and discount book to today at the firm's weighted average cost of capital (WACC)

46
Sensitivity analysis

One of the major uses of financial statement forecasting models is to do sensitivity analysis. We
can see the effect of making changes in any of the input (independent) variables on the other
dependent variable by making the changes in the model. But trying these out one at a time does
not provide us a comprehensive picture. Your management wants to see how Net Income, EPS,
dividend per share, and stock price will change for 2006 for sales growth rates from 1% to 10%
per year over the years. Create a one-input data table to show this information. Also create a two-
input data table to show how EBIT for 2003 will depend on cost of sales to sales ratio and sales
growth rate in a reasonable range.
(Use Model 11 for your analysis.)\

47
 TIME VALUE OF MONEY

FV FUNCTION

Aim: Returns the future value of an investment

Syntax: =FV(rate, nper, pmt, [pv], [type])

Result:

48
49
 FV SCHEDULE Function
Aim: Returns the future value of an initial principal after applying a series of compound interest
rates. The FVSCHEDULE function accepts blank cells as a part of the scheduled array as they
are treated as the numeric value 0.

Syntax: =FVSCHEDULE(principle, schedule)

Result:

50
51
Model : Time value of money

Model 1 Effect of compounding frequency on principle.

Problem: Suppose you have any opportunity to invest rupees 1,00,000 for 10 years at a nominal
interest rate of 8%. Create a model to calculate the effective annual interest rate you will earn
and the amount your investment will grow to its future values for various numbers of
compounding periods per year.

Create a data table

Set up one input data table to show the effective interest rates and the future value of the
investment for daily, by weekly,weekly, monthly,quarterly,semi quarterly and annual
compounding.

Building the model

Step 1 Set up input variables

Step 2 Create formula to calculate effective interest rate
Step 3 Setup calculation for future value using formula
Step 4 Set up calculation for present value using future value function
Step 5 Setup data table

52
53
IRR Function
Aim: IRR (Internal Rate of Return) returns the internal rate of return for a series of cash flows. It
is used when a firm wants to understand whether to accept or reject a proposal based on whether
it is profitable or not.

Acceptance Rule:

IRR > Hurdle Rate ------ (Accept the Proposal)

IRR < Hurdle Rate ------ (Reject the Proposal)

IRR = Hurdle Rate ------ (May Accept/Reject)

Syntax: =IRR(values, [guess])

Result:

54
 MIRR Function
Aim: MIRR(Modified Internal Rate of Return) Returns the internal rate of return where positive
and negative cash flows are financed at different rates.

Syntax: =MIRR(values, finance_rate, reinvest_rate)

Finance Rate is that rate at which capital is introduced.

Reinvest Rate is that rate at which fresh capital is introduced.

Result:

55
International Cash Flows/Foreign Currency Cash Flows
Cash flows arising from transactions in a foreign currency should be recorded in an enterprise’s
reporting currency by applying to the foreign currency amount the exchange rate between the
reporting currency and the foreign currency at the date of the cash flow. A rate that approximates
the actual rate may be used if the result is substantially the same as would arise if the rates at the
dates of the cash flows were 26 AS 3 used. The effect of changes in exchange rates on cash and
cash equivalents held in a foreign currency should be reported as a separate part of the
reconciliation of the changes in cash and cash equivalents during the period.

Cash flows denominated in foreign currency are reported in a manner consistent with
Accounting Standard (AS) 11, The Effects of Changes in Foreign Exchange Rates. This permits
the use of an exchange rate that approximates the actual rate. For example, a weighted average
exchange rate for a period may be used for recording foreign currency transactions.

Unrealised gains and losses arising from changes in foreign exchange rates are not cash flows.
However, the effect of exchange rate changes on cash and cash equivalents held or due in a
foreign currency is reported in the cash flow statement in order to reconcile cash and cash
equivalents at the beginning and the end of the period. This amount is presented separately from
cash flows from operating, investing and financing activities and includes the differences, if any,
had those cash flows been reported at the end-ofperiod exchange rates.

56
Dividend Discount Models

It is a way of valuing a company based on the theory that is the stock is worth the dscounted sum
of all ts future dividend payments in other words it is used to evaluate the stocks based on net
present value of the future dividends.

Formula

Intrinsic value = Sum of Present Value of Dividends + Present Value of Stock Sale Price.

Types of Dividend Discount Model

Zero growth Dividend discount model

This model is used that all the dividends that are paid by the stock remains one and same forever
until infinite.

Constant Growth model

This model assumes that dividends grow at a fixed % annually . They are nt variable and are
constant throughout.

Result:

Zero Growth Rate Model

The Annual Dividend is given as Rs. 1.8 having 8% required rate of return. Calculate the
Intrinsic Value of the Stock.

57
58
 MARKET BASED METHODS

In this ratio enterprise value is compared with sales of the company. If it is higher then it is
considered that company is costlier and not a good bet for the investor and if it is lower then it is
considered to be a great investment opportunity for the investors.

Formula

EV= market capitalization+ o/s debt - cash & its equivalents

It is net sales that we consider for calculation of EV to sales ratio.

EV to Sales ratio

In this the enterprise value is compared with Sales of the company. If EV:Sales ratio is higher
then it is considered that the company is costlier and it is not a good bet for investment.

EV = Market capitalisation + Outstanding debt - Cash, bank and it's equivalence

Question: Market price of the share is Rs 12 per share. Book value per share is Rs. 10 per share.
Total book value of the shares = Rs. 25,00,000
Long term debt = Rs. 30,00,000
Cash and bank = Rs. 5,00,000
Gross Sales = Rs. 15,00,000
Sales return = Rs. 4,00,000
Compute to use EV to Sales ratio

When to use EV to Sales ratio

SITUATION 1 EV to Sales is very helpful when there are significant differences in accounting
policies of company.
SITUATION 2 It can be used for companies with negative free cash flows or unprofitable
companies. EV to Sales ratio can be useful for identifying restricting potential.

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EV to EBITDA multiple

EV to EBITDA is the most important valuation multiple. EV is enterprise value and EBITDA is
earnings before interest tax depreciation and amortization.
The values of EV and EBITDA are used in order to find EV:EBITDA ratio of an organisation
and this matric is widely used to analyse and measure an organisation ROI that is return on
investment as well as it's value.

Example: Company A's income statement is as follows:

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