A B C D E

1 SETTING UP THE FINANCIAL STATEMENT MODEL

2 Sales growth 10%
3 Current assets/Sales 15%
4 Current liabilities/Sales 8%
5 Net fixed assets/Sales 77%
6 Costs of goods sold/Sales 50%
7 Depreciation rate 10%
8 Interest rate on debt 10.00%
9 Interest paid on cash and marketable securities 8.00%
10 Tax rate 40%
11 Dividend payout ratio 40%
12
13 Year 0 1 2 3
14 Income statement
15 Sales 1,000 1,100 1,210 1,331
16 Costs of goods sold (500) (550) (605) (666)
17 Interest payments on debt (32) (26) (26) (26)
18 Interest earned on cash and marketable securities 6 9 18 32
19 Depreciation (100) (116.68) 124.38 121.01
20 Profit before tax 374 417 722 793
21 Taxes (150) (166.70) (288.87) (317.34)
22 Profit after tax 225 250 433 476
23 Dividends (90) (100.02) (173.32) (190.41)
24 Retained earnings 135 150 260 286
25
26 Balance sheet
27 Cash and marketable securities 80 146 314 498
28 Current assets 150 165 182 200
29 Fixed assets
30 At cost 1,070 1,264 1,224 1,196
31 Depreciation (300) (417) (292) (171)
32 Net fixed assets 770 847 932 1,025
33 Total assets 1,000 1,158 1,427 1,722
34
35 Current liabilities 80 88 97 106
36 Debt 320 320 320 320
37 Stock 450 450 450 450
38 Accumulated retained earnings 150 300 560 846
39 Total liabilities and equity 1,000 1,158 1,427 1,722
40
41 Current Ratio
42 Acid Test Ratio
43 Gross Profit Margin
44 Net Profit Margin
45 ROE
46 ROA
47 ROCE
48 Total Debt to Equity
49 Total Debt to Total Assets
 A B C D E
50 Self Financing Ratio
51 Cash Flow Ratio
 F G H
1
2
3
4
5
6
7
8
9
10
11
12
13 4 5 6
14
15 1,464 1,611 1,772
16 (732) (805) (886)
17 (26) (26) (26)
18 48 65 84
19 118.80 117.73 117.80
20 873 962 1,062
21 (349.26) (384.93) (424.70)
22 524 577 637
23 (209.56) (230.96) (254.82)
24 314 346 382
25
26
27 700 924 1,171
28 220 242 266
29
30 1,180 1,175 1,181
31 (52) 65 183
32 1,127 1,240 1,364
33 2,047 2,405 2,800
34
35 117 129 142
36 320 320 320
37 450 450 450
38 1,160 1,506 1,889
39 2,047 2,405 2,800
40
41
42
43
44
45
46
47
48
49
 A B C D
1 FIRST FINANCIAL MODEL
2 Sales growth 10%
3 Current assets/Sales 15%
4 Current liabilities/Sales 8%
5 Net fixed assets/Sales 77%
6 Costs of goods sold/Sales 50%
7 Depreciation rate 10%
8 Interest rate on debt 10.00%
9 Interest paid on cash and marketable securities 8.00%
10 Tax rate 40%
11 Dividend payout ratio 40%
12
13 Year 0 1 2
14 Income statement
15 Sales 1,000 1,100 1,210
16 Costs of goods sold (500) (550) (605)
17 Interest payments on debt (32) (32) (32)
18 Interest earned on cash and marketable securities 6 9 15
19 Depreciation (100) (105.57) (103.22)
20 Profit before tax 374 422 485
21 Taxes (150) (169) (194)
22 Profit after tax 225 253 291
23 Dividends (90) (101) (116)
24 Retained earnings 135 152 175
25
26 Balance sheet
27 Cash and marketable securities 80 148 230
28 Current assets 150 165 182
29 Fixed assets
30 At cost 1,070 1,041 1,023
31 Depreciation (300) (194) (91)
32 Net fixed assets 770 847 932
33 Total assets 1,000 1,160 1,343
34
35 Current liabilities 80 88 97
36 Debt 320 320 320
37 Stock 450 450 450
38 Accumulated retained earnings 150 302 476
39 Total liabilities and equity 1,000 1,160 1,343
40
41
42 Year 0 1 2
43 Free cash flow calculation
44 Profit after tax
45 Add back depreciation
46 Subtract increase in current assets
47 Add back increase in current liabilities
48 Subtract increase in fixed assets at cost
 A B C D
49 Add back after-tax interest on debt
50 Subtract after-tax interest on cash and+A14 mkt. securities
51 Free cash flow
52
53 CONSOLIDATED STATEMENT OF CASH FLOWS: RECONCILING THE CASH BAL
54 Cash flow from operating activities
55 Profit after tax
56 Add back depreciation
57 Adjust for changes in net working capital:
58 Subtract increase in current assets
59 Add back increase in current liabilities
60 Net cash from operating activities
61
62 Cash flow from investing activities
63 Aquisitions of fixed assets--capital expenditures
64 Purchases of investment securities
65 Proceeds from sales of investment securities
66 Net cash used in investing activities
67
68 Cash flow from financing activities
69 Net proceeds from borrowing activities
70 Net proceeds from stock issues, repurchases
71 Dividends paid
72 Net cash from financing activities
73
74 Net increase in cash and cash equivalents
75 Check: changes in cash and mkt. securities
 E F G H
ODEL 1
2
3
4
5
6
7
8
9
10
11
12
13 3 4 5
14
15 1,331 1,464 1,611
16 (666) (732) (805)
17 (32) (32) (32)
18 22 31 41
19 (101.86) (101.47) (102.06)
20 554 629 712
21 (222) (252) (285)
22 332 378 427
23 (133) (151) (171)
24 199 227 256
25
26
27 328 442 576
28 200 220 242
29
30 1,014 1,015 1,026
31 11 112 214
32 1,025 1,127 1,240
33 1,552 1,789 2,057
34
35 106 117 129
36 320 320 320
37 450 450 450
38 676 902 1,159
39 1,552 1,789 2,057
40
41
42 3 4 5
43
44
45
46
47
48
 E F G H
49
50
51
52
: RECONCILING
53 THE CASH BALANCES
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
 NEGATIVE CASH BALANCES: ILLUSTRATION
Sales growth 20% <-- Increased from 10%
Current assets/Sales 20% <-- Increased from 15%
Current liabilities/Sales 8%
Net fixed assets/Sales 80% <-- Increased from 77%
Costs of goods sold/Sales 50%
Depreciation rate 10%
Interest rate on debt 10.00%
Interest paid on cash and marketable securities 8.00%
Tax rate 40%
Dividend payout ratio 50% <-- Increased from 40%

Year 0 1 2 3 4
Income statement
Sales 1,000 1,200 1,440 1,728 2,074
Costs of goods sold (500) (600) (720) (864) (1,037)
Interest payments on debt (40) (40) (40) (40) (40)
Interest earned on cash and marketable securities 6 4 - 0 - 5 - 10
Depreciation (100) (124) (141) (148) (158)
Profit before tax 366 440 539 671 829
Taxes (147) (176) (216) (269) (331)
Profit after tax 220 264 323 403 497
Dividends (110) (132) (162) (201) (249)
Retained earnings 110 132 162 201 249

Balance sheet
Cash and marketable securities 80 28 (31) (95) (164)
Current assets 200 240 288 346 415
Fixed assets
At cost 1,100 1,384 1,435 1,518 1,637
Depreciation (300) (424) (283) (136) 22
Net fixed assets 800 960 1,152 1,382 1,659
Total assets 1,080 1,228 1,409 1,633 1,910

Current liabilities 80 96 115 138 166

Debt 400 400 400 400 400
Stock 450 450 450 450 450
Accumulated retained earnings 150 282 444 645 894
Total liabilities and equity 1,080 1,228 1,409 1,633 1,910

Year 0
Free cash flow calculation
Profit after tax
Add back depreciation
Subtract increase in current assets
Add back increase in current liabilities
Subtract increase in fixed assets at cost
Add back after-tax interest on debt
Subtract after-tax interest on cash and mkt. securities
Free cash flow
 5

2,488
(1,244)
(40)
- 16
(172)
1,016
(407)
610
(305)
305

(241)
498

1,797
194
1,991
2,248

199
400
450
1,199
2,248
 A B C D E
1 NO NEGATIVE CASH BALANCES
2 Sales growth 20% <-- Increased from 10%
3 Current assets/Sales 20% <-- Increased from 15%
4 Current liabilities/Sales 8%
5 Net fixed assets/Sales 80% <-- Increased from 77%
6 Costs of goods sold/Sales 50%
7 Depreciation rate 10%
8 Interest rate on debt 10.00%
9 Interest paid on cash and marketable securities 8.00%
10 Tax rate 40%
11 Dividend payout ratio 50% <-- Increased from 40%
12
13 Year 0 1 2 3
14 Income statement
15 Sales 1,000 1,200 1,440 1,728
16 Costs of goods sold (500) (600) (720) (864)
17 Interest payments on debt (40) (40) (42) (47)
18 Interest earned on cash and marketable securities 6 4.32 1.12 -
19 Depreciation (100) (124) (156) (194)
20 Profit before tax 366 440 524 622
21 Taxes (147) (176) (209) (249)
22 Profit after tax 220 264 314 373
23 Dividends (110) (132) (157) (187)
24 Retained earnings 110 132 157 187
25
26 Balance sheet
27 Cash and marketable securities 80 28 - -
28 Current assets 200 240 288 346
29 Fixed assets
30 At cost 1,100 1,384 1,732 2,157
31 Depreciation (300) (424) (580) (774)
32 Net fixed assets 800 960 1,152 1,382
33 Total assets 1,080 1,228 1,440 1,728
34
35 Current liabilities 80 96 115 138
36 Debt 400 400 436 514
37 Stock 450 450 450 450
38 Accumulated retained earnings 150 282 439 626
39 Total liabilities and equity 1,080 1,228 1,440 1,728
40
41 Year 0 1 2 3
42 Free cash flow calculation
43 Profit after tax
44 Add back depreciation
45 Subtract increase in current assets
46 Add back increase in current liabilities
47 Subtract increase in fixed assets at cost
48 Add back after-tax interest on debt
49 Subtract after-tax interest on cash and mkt. securities
 A B C D E
50 Free cash flow
 F G H
CASH BALANCES
1
2
3
4
5
6
7
8
9
10
11
12
13 4 5
14
15 2,074 2,488
16 (1,037) (1,244)
17 (56) (67)
18 - -
19 (242) (299)
20 739 878
21 (296) (351)
22 443 527
23 (222) (263)
24 222 263
25
26
27 - -
28 415 498
29
30 2,675 3,306
31 (1,016) (1,315)
32 1,659 1,991
33 2,074 2,488
34
35 166 199
36 610 728
37 450 450
38 847 1,111
39 2,074 2,488
40
41 4 5
42
43
44
45
46
47
48
49
 A B C D E

1
TARGET DEBT-EQUITY RATIO
Cash is fixed, ratio of debt/equity changes in each year
2 Sales growth 10%
3 Current assets/Sales 15%
4 Current liabilities/Sales 8%
5 Net fixed assets/Sales 77%
6 Costs of goods sold/Sales 50%
7 Depreciation rate 10%
8 Interest rate on debt 10.00%
9 Interest paid on cash & marketable securities 8.00%
10 Tax rate 40%
11 Dividend payout ratio 60%
12
13 Year 0 1 2 3
14 Income statement
15 Sales 1,000 1,100 1,210 1,331
16 Costs of goods sold (500) (550) (605) (666)
17 Interest payments on debt (32) (30) (29) (28)
18 Interest earned on cash & marketable securities 6 6.40 6.40 6.40
19 Depreciation (100) (53.50) - -
20 Profit before tax 374 473 583 644
21 Taxes (150) (189) (233) (258)
22 Profit after tax 225 284 350 386
23 Dividends (135) (170) (210) (232)
24 Retained earnings 90 113 140 155
25
26 Balance sheet
27 Cash and marketable securities 80 80 80 80
28 Current assets 150 165 182 200
29 Fixed assets
30 At cost 1,070
31 Depreciation (300) (354) (354) (354)
32 Net fixed assets 770 847 932 1,025
33 Total assets 1,000 1,092 1,193 1,305
34
35 Current liabilities 80 88 97 106
36 Debt 320 286.86 284.25 276.47
37 Stock 450 454 409 364
Initial (year 0)
38 Accumulated retained earnings debt/equity ratio: 150 263 403 558
39 Total liabilities and equity =B36/(B37+B38) 1,000 1,092 1,193 1,305
40
41 Target debt-equity ratio 0.53 0.40 0.35 0.30
42
43 Year 0 1 2 3
44 Free cash flow calculation
45 Profit after tax
46 Add back depreciation
47 Subtract increase in current assets
 A B C D E
48 Add back increase in current liabilities
49 Subtract increase in fixed assets at cost
50 Add back after-tax interest on debt
51 Subtract after-tax interest on cash & mkt. securities
52 Free cash flow
 F G H
ITY RATIO 1
changes in each year
2
3
4
5
6
7
8
9
10
11
12
13 4 5
14
15 1,464 1,611
16 (732) (805)
17 (29) (32)
18 6.40 6.40
19 - -
20 710 780
21 (284) (312)
22 426 468
23 (255) (281)
24 170 187
25
26
27 80 80
28 220 242
29
30
31 (354) (354)
32 1,127 1,240
33 1,427 1,562
34
35 117 129
36 302.27 330.65
37 279 187
38 728 915
39 1,427 1,562
40
41 0.30 0.30
42
43 4 5
44
45
46
47
 A B C D E

1
PROJECT FINANCE
No dividends, debt repayment schedule fixed, net fixed assets consta
2 Sales growth 15%
3 Current assets/Sales 15%
4 Current liabilities/Sales 8%
5 Costs of goods sold/Sales 45%
6 Depreciation rate 10%
7 Interest rate on debt 10.00%
8 Interest paid on cash and marketable securities 8.00%
9 Tax rate 40%
10 Dividend payout ratio 0% <-- No dividends until all the debt is paid off
11
12 Year 0 1 2 3
13 Income statement
14 Sales 1,000
15 Costs of goods sold
16 Interest payments on debt
17 Interest earned on cash and marketable securities
18 Depreciation
19 Profit before tax
20 Taxes
21 Profit after tax
22 Dividends
23 Retained earnings
24
25 Balance sheet
26 Cash and marketable securities 0
27 Current assets 200
28 Fixed assets
29 At cost 2,000
30 Depreciation -
31 Net fixed assets 2,000
32 Total assets 2,200
33
34 Current liabilities 100
35 Debt 1,000
36 Stock 1,100
37 Accumulated retained earnings 0
38 Total liabilities and equity 2,200
39
40
41 FREE CASH FLOW CALCULATION
42 Year 0 1 2 3
43 Profit after tax
44 Add back depreciation
45 Subtract increase in current assets
46 Add back increase in current liabilities
47 Subtract increase in fixed assets at cost
 A B C D E
48 Add back after-tax interest on debt
49 Subtract after-tax interest on cash and mkt. securities
50 Free cash flow
51
52
53
54
55
56 RETURN ON EQUITY (ROE)
57 Year 0 1 2 3
58 Equity cash flow
59 RETURN ON EQUITY (ROE)
60
61
62 Data table: ROE as a function of initial
63 equity investment
 F G H

NANCE 1
fixed, net fixed assets constant
2
3
4
5
6
7
8
9
s until all the debt
10 is paid off
11
12 4 5
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42 4 5
43
44
45 Cash flow
generated by
46
depreciation equals
47 capital
expenditures.
 Cash flow
generated by
depreciation equals
F G capital H
48 expenditures.
49
50
51
52
53
54
55
56
57 4 5
58
59
60
61
62
63
 A B C D E

1
PROJECT FINANCE
With these parameters the project cannot pay off its debt
2 Sales growth 15%
3 Current assets/Sales 15%
4 Current liabilities/Sales 8%
5 Costs of goods sold/Sales 55%
6 Depreciation rate 10%
7 Interest rate on debt 10.00%
8 Interest paid on cash and marketable securities 8.00%
9 Tax rate 40%
10 Dividend payout ratio 0% <-- No dividends until all the debt is paid off
11
12 Year 0 1 2 3
13 Income statement
14 Sales 1,000
15 Costs of goods sold
16 Interest payments on debt
17 Interest earned on cash and marketable securities
18 Depreciation
19 Profit before tax
20 Taxes
21 Profit after tax
22 Dividends
23 Retained earnings
24
25 Balance sheet
26 Cash and marketable securities 0
27 Current assets 200
28 Fixed assets
29 At cost 2,000
30 Depreciation 0
31 Net fixed assets 2,000
32 Total assets 2,200
33
34 Current liabilities 100
35 Debt 1,000
36 Stock 1,100
37 Accumulated retained earnings 0
38 Total liabilities and equity 2,200
39
40
41 FREE CASH FLOW CALCULATION
42 Year 0 1 2 3
43 Profit after tax
44 Add back depreciation
45 Subtract increase in current assets
46 Add back increase in current liabilities
47 Subtract increase in fixed assets at cost
 A B C D E
48 Add back after-tax interest on debt
49 Subtract after-tax interest on cash and mkt. securities
50 Free cash flow
51 Note that the cash flow generated by
52 depreciation equals the increase in fixed
53 assets at cost.
54
55
56 RETURN ON EQUITY (ROE)
57 Year 0 1 2 3
58 Equity cash flow
59 RETURN ON EQUITY (ROE)
60
61
62 Data table: ROE as a function of initial
63 equity investment 2,000
64 1,800
65 1,600
66 1,400
67 1,200
68 1,000
69 800
70 600
71 400
72 200
 F G H

NANCE 1
ct cannot pay off its debt
2
3
4
5
6
7
8
9
s until all the debt
10 is paid off
11
12 4 5
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42 4 5
43
44
45
46
47
 F G H
48
49
50
51
52
53
54
55
56
57 4 5
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
 A B C D E
1 COMPUTING THE ROE IN THE FIRST FINANCIAL MODEL
2 Sales growth 10%
3 Current assets/Sales 15%
4 Current liabilities/Sales 8%
5 Net fixed assets/Sales 77%
6 Costs of goods sold/Sales 50%
7 Depreciation rate 10%
8 Interest rate on debt 10.00%
9 Interest paid on cash and marketable securities 8.00%
10 Tax rate 40%
11 Dividend payout ratio 40%
12
13 Year 0 1 2 3
14 Income statement
15 Sales 1,000
51
52
53 Valuing the firm (mid-year discounting)
54 Weighted average cost of capital 20%
55 Long-term free cash flow growth rate 5%
56
57 Year 0 1 2 3
58 FCF
59 Terminal value
60 Total
61
62 Enterprise value, NPV of row 60
63 Add in initial (year 0) cash and mkt. securities
64 Asset value, year 0
65 Subtract out value of firm's debt today
66 Equity value
67
68
69 RETURN ON EQUITY (ROE)
70 Year 0 1 2 3
71 Projected dividends
72 Anticipated equity value, year 5
73 Equity cash flow
74 RETURN ON EQUITY (ROE)
 F G
ANCIAL MODEL
1
2
3
4
5
6
7
8
9
10
11
12
13 4 5
14
15
51
52
53
54
55
56
57 4 5
58
59
60
61
62
63
64
65
66
67
68
69
70 4 5
71
72
73
74
 A B C D
1 PROFIT AND LOSS WITH CARRYFORWARD
2 Year 1 2
3 Earnings before interest and taxes (EBIT) -100 400
4 Interest -50 -80
5 Profit before tax
6 Loss carryforward
7 Taxable income
8 Taxes (30%)
9 Profit after tax
10
11
12 Free Cash Flow (FCF) with No Debt
13 Year 1 2
14 Earnings before interest and taxes (EBIT)
15 Interest
16 Profit before tax
17 Loss carryforward
18 Taxable income
19 Taxes (30%)
20 Profit after tax
21 Add back tax-loss carryforward
22 Free cash flow (FCF)
23
24 CALCULATING FCF FROM PROFIT AND LOSS STATEMENT
25 Year 1 2
26 Earnings before interest and taxes (EBIT)
27 Interest
28 Profit before tax
29 Loss carryforward
30 Taxable income
31 Taxes (30%)
32 Profit after tax
33
34 FCF Calculation
35 Profit after tax
36 Add back loss carryforward
37 Add back interest, net of tax
38 Subtract interest tax shield on carryforward
39 Free cash flow (FCF)
 A B C D E
1 ACCELERATED DEPRECIATION
2 Sales growth 10%
3 Current assets/Sales 15%
4 Current liabilities/Sales 8%
5 Net fixed assets/Sales 77%
6 Costs of goods sold/Sales 50%
7 Depreciation rate 10%
8 Interest rate on debt 10.00%
9 Interest paid on cash & marketable securities 8.00%
10 Tax rate 40%
11 Dividend payout ratio 40%
12
13 Year 0 1 2 3
14 Income statement
15 Sales 1,000
16 Costs of goods sold (500)
17 Interest payments on debt 45
18 Interest earned on cash & marketable securities 6
19 Depreciation (100)
20 Profit before tax 451
21 Taxes (181)
22 Profit after tax 271
23 Dividends (108)
24 Retained earnings 163
25
26 Balance sheet
27 Cash and marketable securities 80
28 Current assets 150
29 Fixed assets
30 At cost -
31 Depreciation 0
32 Net fixed assets -
33 Total assets 230
34
35 Current liabilities 80
36 Debt (450)
37 Stock 450
38 Accumulated retained earnings 150
39 Total liabilities and equity 230
40
41
42 Year 0 1 2 3
43 Free cash flow calculation
44 Profit after tax
45 Add back depreciation
46 Subtract increase in current assets
47 Add back increase in current liabilities
48 Subtract increase in fixed assets at cost
49 Add back after-tax interest on debt
 A B C D E
50 Subtract after-tax interest on cash & mkt. securities
51 Free cash flow
52
53
54 DEPRECIATION CALCULATION--year 0 assets assumed 3 years old
55 Sales growth
56 Net fixed assets/Sales
57 Sales
58
59 Year 0 1 2 3
60 Fixed assets at cost, end of year
61 Accumulated depreciation
62 Net fixed assets required, end of year
63
64 New assets acquired during year
65
66 Accumulated depreciation calculation
67 Accumulated depreciation, end of previous year
68 Depreciation of year 0 assets
69 Depreciation of assets acquired year 1
70 Depreciation of assets acquired year 2
71 Depreciation of assets acquired year 3
=VLOOKUP(3+C$59,$A$80:$B$85,2)*$B$60
72 Depreciation of assets acquired year 4
73 Depreciation of assets acquired year 5
74 Accumulated depreciation
75
76 =VLOOKUP(C$59,$A$80:$B$85,2)*$C
77
78 Depreciation table--5-year asset life
Depr. Cum. =VLOOKUP(D$59-1,$A$
79
Year rate depr.
80 1 20.00%
81 2 32.00%
82 3 19.20%
83 4 11.52%
84 5 11.52%
85 6 5.76%
86
87 Average depreciation over 6 years
88
89 ALTERNATIVE: Assume straight line depreciation
90 Year 0 1 2 3
91 Assets in place, end of year
92 Accumulated depreciation
93 Net fixed assets required, end of year
94
95 Accumulated depreciation calculation
96 Accumulated Depreciation, end of previous year
97 Depreciation of average assets in year, 20%
 A B C D E
98 Accumulated depreciation
99
100
101 Cash flow effect
102 Tax shield on accelerated depreciation
103 Tax shield on straight-line depreciation
 F G H I
ECIATION 1
2
3
4
5
6
7
8
9
10
11
12
13 4 5
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42 4 5
43
44
45
46
47
48
49
 F G H I
50
51
52
53
54
55
56
57
58
59 4 5
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
VLOOKUP(C$59,$A$80:$B$85,2)*$C$64
77
78
=VLOOKUP(D$59-1,$A$80:$B$85,2)*$D$64
79
80
81 =VLOOKUP(E$59-2,$A$80:$B$85,2)*$E$64
82
83
84
85
86
87
88
89
90 4 5
91
92
93
94
95
96
97