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Advanced Financial Modeling

Advanced Functions
 Agenda
• Introduction and Context in Advanced Functions for Modeling
• Models with Advanced formulas and tools
– Modeling Using Named Ranges
– Revenue Matching (Index Match)
– Credit Transition Analysis (Array Functions and Lookups)
– Portfolio Analysis (SumProduct)
– Generating Scenarios (Offset function)
– Building Flexible & Growing Models (Offset, Index)
– Consolidating revenues from different sheets (Indirect)
– Valuation of Startup in e-commerce (Goal Seek)
– Synergy Modeling (Solver)
– Deferred Taxes and Loss Carried Forward (Max, Min)

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 Named Ranges as Methodology for Modeling

• P&L Information for a company is given

• Create a model, using Named Ranges Use Par-Modeling-Named-Ranges

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 Define Named Ranges for various items

Just like we can define names for

individual cells, we can define ranges

Numbers for all the years can be

calculated at one shot:
Ctrl + Enter

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 Define all named ranges

Define Range Names for all important line

Items

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 Case: Selecting the relevant Revenue

• Revenue figures for GE are given with the

following details
– Quarter wise
– Product wise
– Region wise
• The arrangement of the data cannot be changed
• The management might need to select a
particular revenue figure

Use Par-Rev-Matching

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 Define Names for Ranges and Match

Define Range Names

Use the Match function to Get the position of

Mont, Region and Division

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 Use Index to Get the relevant Value

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 Your Portfolio
Case: Credit Rating for Your Bond Portfolio

• For all the bonds, the following information is provided

– Starting ratings at the beginning of year 1
– Probability of transitioning to other rating at the end of year 1
• You have invested in a portfolio
– What is the probability that these bonds would be rated BBB+ of below at the
end of Year 2?

Rating Transition Matrix

Use Par-Credit-
Rating-Transition

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 Use Matrix Multiplication to get to “n” Year Default Transition Matrix

To start with create the 2 year transition matrix - If For Matrix Multiplication, use
A is the rating transition matrix for 1 year, A2 CTRL + SHIFT + ENTER
would be the transition matrix for 2 years

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 A^2 gives the two year Transition Matrix

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 Use Vlookup or a combination of Index and Match to look for relevant
Prob

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 Case: Portfolio Analysis

• Alice is a trader in the Indian Market and

has entered in the trades indicated below:

• Analysis is required for:

Use Par-Stock-Portfolio

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 Using Sumproduct

SumProduct Multiplies corresponding cells in two

cells. It can act on conditions as well

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 Using Sumproduct with a condition

-- Indicates conditions in SumProduct

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 Case: Creating Flexible Models for Scenarios

• Company DeltaTheta is planning for business

plan for board presentation
– The management believes that it is living in
uncertain times Product COGS
Product A
B as % of Tax Rate
– Presenting just one scenario to the Growth
Growth Sales
management would not make sense
– They want to present various cases (based on
the economic conditions to the board Best Case Scenario 40% 50% 30% 28%
Moderate Case
Scenario 20% 30% 40% 30%

Worst Case Scenario 5% 10% 50% 32%

• A flexible model needs to be created,

– With a single switch the board should be able
to change the scenario and see the results

Use Par-Scenarios

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 Using Offset function to select a scenario

Use the offset function to choose the relevant

scenario

Model can be linked to the selected scenario

numbers

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 Case on Flexible Model Generation

• Most of the models that we have created, require the number of years of the model to be pre-known.
If the model creation needs flexibility
– The number of years of cash generation is not known before hand
• A Real estate Project is undertaken:
– The asset bought at USD 1000 Mio
– The years of operations can be 4 or 5 or 6
– Post that the project is sold

Use Par-Flexi-Model-IRR

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 Creating a flexible NPV, IRR model using Offset

• Offset function in excel returns a reference to a range that is offset a number of rows and
columns from another range or cell Offset(range, rows, columns, height, width)
– Range is the starting range from which the offset will be applied
– Rows is the number of rows to apply as the offset to the range
– Columns is the number of columns to apply as the offset to the range
– Height is the number of rows that you want the returned range to be
– Width is the number of columns that you want the returned range to be

• Offset function can be used to generate dynamic ranges in the NPV and the IRR function

Offset function used to create Count function to count the

dynamic range number of years of ops

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 Creating a flexible NPV, IRR model using Index

Dynamic Range can be created using

the Index Function

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 Case: Consolidating Revenues

• Pristine gets the month wise sales revenue in different sheets

– Pattern in Sheet Names (Dmonth: For example, Djan, Dfeb, etc)
• Need to consolidate the revenues in a single sheet

Use Par-Consolidate-Indirect

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 Find the Name of the Sheet and Use Indirect Function to Generate
Reference

Use the Pattern in the Sheet name and the

columns to generate the Names and Reference
names

Use the Indirect function to generate the actual

reference to the sheet and the Range

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 Find the Sales Number and Clean

Use Index and Indirect to find the relevant Sales

Use Iferror to remove the errors

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 Get the Consolidated Revenues

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 Case on Goal in Valuation

• FK Mart is a startup in the e-commerce space and is looking for a valuation of USD 10 Mio in the next
Year.
• The CEO had a meeting with the VCs and the following direction emerged from the discussion
– VCs are very bullish on the space
– You have no revenues right now
– It is difficult to enter into this space. But if you can penetrate the market, it would be great!
– Typically VCs ready to give a valuation of 10x the revenues
• The CEO had a discussion with the SEM guy
– We need to “buy traffic”
– A typical conversion rate in our space is 5%
– We are selling at an average price of USD 300
– I think if we can get sufficient “footfalls” on our site, it would get the job done
– I have also found that if we send targeted ads on Google, we can convert 0.5% of the impressions to be
clicked
– Google charges a bomb: USD 0.85 per click!
• CEO has to meet the board to get an approval for the funds to get the ad budget
– How many impressions are needed?
– What should be the budget for the advertisements?
Use Par-Valuation-ecom-Startup

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 Getting the Basic Model in Place

Based on the Assumptions, generate

the complete model

We need to get the valuation to USD

10 Mio

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 Goal Seek to the Goal

Goal Seek to the relevant Goal

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 Case on Synergy

• Pristine has two product offerings:

• FRM Material
– In the form of books
– Detailed material with 300+ pages
– Requires huge upfront cost
– Printing cost is low as it is plain vanilla printing
• VisualizeFRM
– Innovative charts
– Summarized material
– Upfront cost is lower
– Printing cost is high
• There is a synergy in the two products
– If 1 unit of FRM Material is sold, the cost of VisualizeFRM goes
down by 1 unit and vice versa
• What would be the breakeven point of sales?
• How many units need to be sold so that product wise also, they
breakeven?
Use Par-Solver-Synergy

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 Formulating the Problem

Revenue = Price x Vol

Variable Cost (VFRM) =

Cost (VFRM) x Units (VFRM) – Synergy Benefit x Units (FRM Mat)

Total cost = Fixed Cost + Var. Cost

Profit = Rev - Costs

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 Optimizing for Break Even Point

Activate Solver

Update with Objective Function and

Variables

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 Problems and Constraints

Overall Breakeven, but not

productwise

Add constraints of individual

product breakeven

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 Deferred Tax and Loss Carried Forward

• Deferred Taxes are created due to differences in method of calculation of depreciation for book
accounting and for income tax accounting
– For example, Straight Line Method (SLM) is used for calculating book profit while Written Down Value
(WDV) / Double Depreciation Method (DDM) is adopted for calculating taxable income, leading to creation
of deferred tax assets in the initial years
• Carry Forward Losses are created if a company can enjoy benefit of netting off historical losses
against future taxable incomes
• Both these concepts can be incorporated into an integrated financial model using simple steps as
shown in the following slides

Use Par-Loss Carry Forward

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 Deferred Tax and Loss Carried Forward

• We begin by inputting assumptions on Asset Value and Asset Life, and calculate the PBT as per book
accounting
• Next, we calculate net blocks as per book accounting, by calculating the year-wise depreciation as
per SLM
• Finally, we calculate net blocks as per income tax accounting, by calculating the year-wise
depreciation as per DDM /WDV
We input the assumptions on
Asset Value, Asset Life and
Tax Rates

We calculate the Net Block as

per book accounting using
Depreciation as per SLM

We then calculate the Net

Block as per Income Tax using
depreciation as per DDM

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 Deferred Tax and Loss Carried Forward

• We calculate the taxable income which is equal to higher of 0 and PBT arrived at, using depreciation
as per DDM
• Then, we calculate the unabsorbed loss which is equal to absolute value of any negative PBT arrived
at, using depreciation as per DDM
• We calculate the amount of carried forward loss to be utilized this year, by taking the minimum of that
year’s taxable income and last year’s cumulative loss carried forward

We add Depreciation as per books

and deduct Depreciation as per
Income Tax to PBT as per books

Taxable Income is higher of 0 or the

value calculated above

We calculate Unabsorbed loss as

absolute value of any negative PBT
arrived as per Income Tax, wherever
applicable

Cumulative Losses from previous

years are netted off against any
current year profits to the extent
possible

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 Deferred Tax and Loss Carried Forward

• Cumulative Loss Carried Forward is calculated as Cumulative Unabsorbed Loss minus Cumulatively
Utilized Loss
• Then, Taxable Income is calculated as Taxable Income minus any Carried Forward Loss to be Utilized
that year
• Finally, Actual Tax Paid is calculated as % Tax Rate multiplied by Actual Taxable Income

Cumulative Loss Carried Forward is

Cumulative Unabsorbed Loss minus
Cumulatively Utilized Loss Carried Forward

Actual Taxable Income is Taxable

Income earlier calculated minus any
portion of Loss Carried Forward to
be Utilized this year

Actual Tax Paid is Effective

Tax Rate multiplied by Actual
Taxable Income

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