MODULE 2

1. While preparing a financial model what are the assumptions we need to take. Please
list down the list of assumptions with the values, assuming the project will be set up
in India.
Financial modelling is done to measure the performance or it is the summary of the
business in accordance to their past performances. The financial model is done by using
the excel or spreadsheet for the decision that will effect the future. The assumption for
preparing a financial model which we need to take are:
Revenue projection
The deviation of the earning per share and cash flow and therefore stock valuation.
Historical records of revenue is being checked for the future. It is important to analyze
the past what has affected revenue in the past so that the assumption for future can be
made. The management gave revenue guidelines for the purpose of the future policies.
Future revenue projection is driven by the formula
R1=R0×(1+g)
WHERE: R1= FUTURE
R0=CURRENT
G=PERCENTAGE OF GROWTH RATE
Operating expenses and margin
There is huge difference between fixed cost and variable cost. If selling, general and
administration revenue are between 8% to 10% in past ten years then it can be fall in
future. This could be projection tempered by management guidance and over look the
business as a whole. If business is growing rapidly then the revenue growth will be more
than cost of selling, general and administration will be less in next year. Expense line
assumption are often reflected as percentages of revenue and the spreadsheet cells
containing expense items usually have formulas such as:
E1=r1 *p
Where e1= expense
R1=revenue for the period
P=expense percentage of revenue for the period
Non operating expenses
It is basically the expenses which include the taxes and interest payment. It is not linked
with the revenue but pre tax income. The tax rate is depend on the operating of the
business how widely it is spread and if it is domestic than it will have the benefit of state
tax only. The historical track is measured in every assumption.
Earning and earning per share
The net income for shareholders are the net revenue minus projected expenses.
EPS is the primary outcomes of a financial model as it is frequently used to value equities
or target prices of the stock. Calculate a one year target price they have to look EPS for
four quarter in the future and multiply it by assumed p/e multiple. The return of the stock
will be the difference of the target price to the current price.
Projected return= T-P/T
WHERE : T= target price
P= current price
The bottom line
 The price of the stock is inextricably linked but investor try to outlook the performance
and measure the price of the stock to invest in the equity. The past performance is
measured and through this the financial statement is used to predict the future or equity
evaluation.

2. Explain the function of revenue, cost and debt sheet of the financial model.
Revenue is the value of sales and income by the company form in the beginning of the
companies income statement. Revenue is calculated by number of unit sold multiply by
average price.
Revenue on the income statement or others finances: the revenue is most important in the
business. Without revenue the business can’t survive. The revenue is calculated for the
expenses made by the business and to give salaries to the employees. If the company is
able to made these expenses then the surplus in the balance sheet is used. After that the
company survival will be difficult. The revenue tells about the position of the company
so that the investor can invest in it.
The function of the cost and debt sheet is really useful in the financial model as it
describe about the cost incurred and debt taken by the firm. The cost is for making a
product or to give salary. The overall cost is based upon the liabilities and outgoing of
cash flow in the business. The flow of cash outside the business is the cost. To recover it
the financial model help the business to forecast the business conditions. And to make the
decision according to it. The debt that business have and maintain their interest is such a
big task for the business and financial model will help on this. The cost and debt sheet
both are important as the income and cash flows are described by it.

3. Explain in detail the various steps involved (with the importance) in the fin flows
sheet. Why and what the bank needs to check before financing the project.
Steps involved in the fin flow statement:
 Determine the change in working capital
 For non current account on the balance sheet establish the change in that account.
Analyze the change source or working capital.
 Determine the adjusted account to be made to net income.
 Total should be correct using those operation to be minus the total of uses equal to
the change of working capital.
The income statement is the first which is prepared it is prepared by using the
revenue and income of the business. Preparing the net earning of the business as
retained earning which the business are having for their profit and dividend
distribution. The balance sheet is prepared for the management of liabilities and
assets held by a business. To know the correct financial position of the company.
The cash flow statement is prepared for the liquidity of the business. The business
story can be recognized by the statement.

Importance of fin flow sheet as it shows the company’s financial position. Financial statement
as it provide the decision making for the business from which area of the company having the
greater ROI.
The shareholders get the information through the statement and how much company is making
profit is listed in this.
Through the fin flow statement the liquidity and creditability of the business is known by the
lenders and creditors.
The bank needs to check the project is correct or not. The purpose of the loan should be
considered as the main thing why they need a project. Banks need to check the documents and
the project as they need a assure repayment of the loan. The collateral is used by the bank so that
they can get assure about the repayment. If the project fails then they can sell the collateral to
recover payment. How much they need capital for their project as the bank need to know the
amount of capital they are investing in the business. The project should be profitable that it can
pay back the money as the bank will look for the plan and the borrower can return the money or
not. So bank need all the information before granting of the loan.