A financial model is a built into Excel to forecast a business’ financial performance into the

future. It is based upon the company’s historical performance whilst assumption about the future
is made. Through the preparation and forecasting of an income statement, balance sheet and cash
flow statement, a three statement model can be built into a spreadsheet. This then lies
foundational basis for making more complex models such as a discounted cash flow (DCF) or
merger and acquisition (M&A) models, which can both predict how certain environmental
factors could impact business (Koop, 2019) .This paper will be exploring articles in the Wall
Street Journal (WSJ) make use of financial modeling terms and concepts to illustrate their point.
It is important to consider that WSJ doesn’t explicitly show financial models, but more so
integrates specialist terminology and concepts derived from the models.

THE VALUATION COUNDRUM IN THE UNITED TECH –PYTHEON MERGER)

This article is about a merger of equals between UTC Aerospace Systems And Raytheon Co,
suggesting that the financial modeling indicates that the deal is not as clear cut as it seems. More,
so that the merger is ‘’unequal’ ’as 57% of new shares will end up with UTC’s shareholder and
43% with Raytheon’s based upon the value of discounted cash flow (DCF’s) which the article
refers to as a notoriously flexible measure. The author of this article, Jon Sindreu, makes a
critical evaluation of the deal by adding that the DCF valuation doesn’t match up to the market
value of both companies, as UTC will be spinning off its air conditioning and elevator business
divisions before the merger. A spinoff is when a creates expecting its value to rise as a separates
entity – surely this would downsize the value of UTCs shares before the merger and it can be
seen that the author has a point (Fontinelle, 2020)

William Ackman, an activist UTC shareholder, adds that the merger favors Raytheon. However,
Sindreu argues that this is based upon a ‘’bullish’ ’estimate of UTCs excepted future valuation,
which he later backs up with three spinoff statement. Despite this, Sindreu also shares that the
valuation metrics suggest that Ackman has a point as Raytheon’s performance when the deal was
announced was slightly better. Figure shows how different fevers were used to estimate the value
of UTC after the spin offs, with the author adding that the discounted cash flows are an
optimistic value of measure in this case due to differing input into the model. The diagram shows
that the theoretical stock price of UTC could range between $72 and $103 after the terms of the
merger were announced and the spin offs have been made.
 120

100

80

60

40

20
Uncertain Values
0
F e os F
FC pr ic r ati DC
to e E By
V ar P/
erM t Sh By
pe re
n
By cu
r
By

Forecasted valuation of UTC Share Price

Source: Barclays (UTC, 2020 Estimates)

Now, vast array of forecasting method such as the peer price to earnings and discounted cash
flows. The peer price to earnings ratios is a statistics used to value of company shares,
calculating by dividing by price per share (Edison, 2019) A lower price earing per share for
small company who pay a higher percentage of earnings to its investors through dividend,
whereas higher price to earnings rates indicates that dividend are small and that investors are
willing to pay a large amount for an expected growth in earnings and cash flow
(Edison,2019).The relevance of this to the article is that as the company will be spinning off two
of its divisions, there will be less shares available and this cannot be taken into account properly
in P/E ratios.

Method for future valuation should be equivalent the raw data input in consistent across the
boards; they should give the same value. So, discounted cash flows and price-to-earnings ratios
should be equal and both are based on the different assumptions, but their forecasts different. A
discounted cash flow (DCF) is an example of financial modeling valuation method which
analyses the potential scenario, in this case a merger, in order to determine the value of an
investment based on its future cash flow. Discounted cash flow represents the net present value
of projected cash flow to shareholders and providers to capital. Whilst taking into account what
could happen if the product and shares of company are discounted. This means that changes to
the strength of currency and value of money are taken into account for potential shareholders
within the free cash flows of the business. In Laymen’s terms, this means that discounted cash
flow tells us that what the value of shares will be respect to change in the currency, and it is the
preferred method of modeling as it takes historical performance into account greatly.

Circularity is inserted into the model when you connect interest cost into your income statement.

 Net earnings are reduced (interest cost decreases net earnings)

 Cash available for debt reduction is decreased (lower net sales yields lower cash flows)
 Debt rates are therefore increasing (lower cash flows mean less cash for debt pay-down)
 Increases in interest rate (higher debt yields higher interest expense)
 This is the circular reference in a model of a financial statement.
 References:

Financial Modeling Techniques. (n.d.). Retrieved November 4, 2020, from Wallstreetprep.com

website: https://www.wallstreetprep.com/knowledge/financial-modeling-techniques/

NPR Choice page. (n.d.). NPR. Retrieved from

https://www.npr.org/2019/06/10/731225619/raytheon-and-united-technologies-merge-to-

create-a-new-aerospace-giant#:~:text=and%20United%20Technologies%20Corp.,

%2474%20billion%20in%20annual%20sales.

Raytheon Company, & United Technologies Corp. (2019, June 9). Raytheon and united

technologies aerospace businesses to combine in merger of equals. Retrieved November

4, 2020, from PR Newswire website: https://www.prnewswire.com/news-

releases/raytheon-and-united-technologies-aerospace-businesses-to-combine-in-merger-

of-equals-300864268.html

United Technologies, Raytheon to combine as defense giant. (2019, June 10). Retrieved

November 4, 2020, from Industryweek.com website:

https://www.industryweek.com/leadership/article/22027717/united-technologies-

raytheon-to-combine-as-defense-giant

(N.d.). Retrieved November 4, 2020, from http://chrome-

extension://ohfgljdgelakfkefopgklcohadegdpjf/http://www.diva-

portal.org/smash/get/diva2:429509/FULLTEXT01.pdf