WHAT IS FINANCIAL MODELING

How does a retail organization decide when, where and how big a store to open?
How does an entrepreneur decide whether his idea makes sense or how does a
venture capitalist decide if he should fund that idea? How does an investment
banker decide how much money will a company be able raise and at what cost or
how does he help his client arrive at a valuation for a merger and acquisition
transaction.

Overview

Financial Modeling is a core skill that is almost mandatory for anyone who wants to
build a career in finance. It is also important for anyone who wants to start his or her
own business and even useful for sales/marketing professionals as it comes in handy
in bidding for projects, determining payback/utility of campaigns etc.

Whenever, we need to make a financial decision, we make a projection of what

revenue and costs are likely to be and on the basis of such projections, evaluate if
that is a wise decision. In a stock market analysis, we look at the past performance
of a company as project what the revenue, costs and profit of the company are likely
to be and therefore if we should buy, sell or hold that share.

Applications

 Investment Banking / Equity Research:

Financial Modeling is the basic tool for fundamental analysis and
valuations. Investment banker use it to arrive at a valuation in M&A or
fund raising transactions. Equity Analysts use it to value stocks and come
up with buy/sell/hold recommendations.
 Project Finance/Credit Rating:
Financial model help bankers, credit analysts to project future revenues
and costs and to make an informed judgment about a projects viability.
They are then able to decide if they should extend loans or what the credit
rating of a project or company should be.
 Corporate Finance:
Financial Modeling is used by companies to assess their own finances and
projects.  It is hence an input in creating funding plans for corporate
projects.
  Entrepreneurs/Private Equity:
Entrepreneurs use Financial Models to present their plans to potential
investors as much as to plan their strategies. Running different
simulations can often be an important tool in avoiding potential risks
Types of Financial Models

Financial Models can vary in from, type and complexity based on the purpose for
which they are built. It can be a one sheet model for a quick analysis or it can be a
multi-sheet, multi workbook model with several cross links for a company or an
industry. Some of the common applications of financial modeling are:

Valuation using DCF

Discounted Cash Flow (DCF) analysis is one of the most common methods of
valuation. DCF analysis gives the result of a company’s current value, known as “net
present value,” by forecasting its future free cash flows. It functions on the principle
that the value of a business is the sum of its projected future free cash flows,
discounted at a suitable rate.

Leveraged Buyout Model (LBO)

In a leveraged buyout a firm finances an acquisition through large amount of debt.

So the LBO modeling exercise is done to estimate whether the business is likely to
sustain the debt or what level of business performance will be required to make an
eventual sale and retire the debt.

M&A model

The entire objective of merger modeling is to understand the impact of an

acquisition to the acquirer’s EPS and how the new EPS compares with the existing
one. If the new EPS being higher, the transaction is called “accretive” while the
opposite scenario would be termed as “dilutive”.

Comparable Company Analysis

In this analysis we we compare the financial metrics of a company against similar

firms in industry. It is based on an assumption that similar companies would have
similar valuations multiples, such as EV/EBITDA, P/E, P/BV.

Credit Rating Model

As the name suggests, this model is mainly used by Credit analysts to assess the
creditworthiness of the company. The model makes assumptions regarding the
future earnings, cost and ebitda margins and assesses if the company will have the
ability to pay interest and principle.

Skills

Prerequisites
Financial Statements; Financial Management and Ratio Analysis; Valuation Methods
Excel, Written Communication, Analytical Ability
Core Skills
Financial Statement Analysis, Building financial statements in Excel, Building
Financial models
Related Skills / Knowledge
Understanding of Financial markets like market structure, mutual funds, debt
markets, credit appraisal and ratings etc.
To acquire Financial Modeling skills : CLICK HERE
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Proschool organizes online informative webinars on Financial Modeling which are

conducted by expert faculty and industry professionals.
Proschool has classroom centres located in Mumbai, Pune, Delhi, Chennai,
Bangalore, Hyderabad, Gurgaon & Kochi. Proschool also provides Online training
mode or Live Virtual Classes.

Check the schedule for webinar here:

 12th April at Online Centre

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