FM eBook - Part 3-finaciall modelling
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Transcript of FM eBook - Part 3-finaciall modelling
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Financial Modeling E-book
Part 3 of 4
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Completing the Income Statement
Forecast shares outstanding
Reference back to historical count
We will use the share count to calculate EPS and share repurchases
Calculate remaining line items (except for Interest Expense/ Income)
Calculate all relevant ratios for forecasting
Calculate CAGR for all line items
* Separate Schedule for Interest expense would be developed later in the module
Private and Confidential – Not for Circulation 2
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Income Statement - Sample
Forecast shares outstanding based on historical share count
Leave shares outstanding constant at this stage
Alter the forecast of shares after drawing up Shareholder’s Equity Schedule and shares outstanding
Private and Confidential – Not for Circulation 3
Assume constant at this stage
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Income Statement - Sample
Complete the margins and growth rates on the Income Statement
Leave interest expense, interest income and taxes blank at this stage
Calculate EBIT, pretax income and net income
Take care to get the past data and calculations right in order to proceed smoothly
Private and Confidential – Not for Circulation 4
Calculations
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Income Statement - Sample
Complete the margins and growth rates on the Income Statement
Private and Confidential – Not for Circulation 5
Calculations
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Income Statement - Sample
Calculate forecasted taxes – assume reasonable effective taxes
Private and Confidential – Not for Circulation 6
Calculations
Driver
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Income Statement - Sample
Calculate relevant growth rates for forecast period
Ensure the long term growth rates, CAGR, are reasonable
Private and Confidential – Not for Circulation 7
Calculate
relevant CAGRs
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Shareholder’s Equity Schedule
Equity Schedule Overview
Set up the line items and input past information
Forecast
• Share Repurchases
• Option proceeds & new shares issued for exercised options
• Dividends
• Future equity balances
Link up
• Ending balances to Balance Sheet
• Repurchase, options and dividends to Cash Flow Statement
* Separate Schedule for Interest expense would be developed later in the module
Private and Confidential – Not for Circulation 8
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Shareholder’s Equity - Sample
Set up the Shareholder’s equity schedule
Input past information – reconciliation of past data may be difficult, read through balance sheet to get cues
Make provision in the model for share repurchase, options and dividends
Private and Confidential – Not for Circulation 9
Referenced from BS
Past data may be
difficult to reconcile
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Shareholder’s Equity - Sample
Input past information on share repurchases
Private and Confidential – Not for Circulation 10
Inputs
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Shareholder’s Equity - Sample
Private and Confidential – Not for Circulation 11
Referenced from Income Statement
Calculations
Assumption/ Driver
Use reasonable estimates for EPS Multiple based on past trends or research
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Shareholder’s Equity - Sample
Private and Confidential – Not for Circulation 12
Calculations
Driver
Calculate the amount spent on share repurchase plans
Consider past information on share repurchase plans
Look out for research and management announcements on the same
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Shareholder’s Equity - Sample
Private and Confidential – Not for Circulation 13
Input appropriate past information on options exercised
Inputs
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Shareholder’s Equity - Sample
Assume reasonable levels of option conversions in the forecast period
Average strike price is commonly used to determine option proceeds
Another approach is to assume total proceeds
Private and Confidential – Not for Circulation 14
Calculations
Inputs
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Shareholder’s Equity - Sample
Input all past information on dividends – dividend per share would be an important measure, make sure to calculate the same
Private and Confidential – Not for Circulation 15
Calculations
Inputs Referenced from Income Statement
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Shareholder’s Equity - Sample
Forecast estimated dividends using
Pay out ratio
Fixed dividend outgo
Per share payout
Private and Confidential – Not for Circulation 16
Driver
Calculations
Referenced from Income Statement
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Shareholder’s Equity - Sample
Forecast equity account in its entirety
Private and Confidential – Not for Circulation 17
Referenced
Assumption
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Shareholder’s Equity - Sample
Private and Confidential – Not for Circulation 18
Link up with Balance Sheet
Referenced from
Shareholders Equity Schedule
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Shareholder’s Equity - Sample
Link the projected change in equity schedule items to Cash Flow Statement
Private and Confidential – Not for Circulation 19
References
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Illustrative Flow of Funds
Private and Confidential – Not for Circulation 20
Working Capital, Depreciation, Amortization, Other LT Items and Equity Schedules
Income
Statement
Cash Flow
Statement
Balance
Sheet
Working
Capital
Sales
COGS
Change in WC
Working Capital
PP & E,
Depreciation
Depreciation
Intangibles,
Amortization
Am
ort
ization
Intangibles
Am
ort
ization
Other Long
Term Items
Shareholder’s
Equity
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Shares Outstanding Schedule
Enter past share information
Basic Shares – actual and average
Capture past effects of options and convertibles as appropriate
Diluted Shares - average
Reference Shares repurchased and new shares from exercised options
Calculate forecasted basic shares (actual)
Calculate average basic and diluted shares
Reference projected shares to Income Statement (recall Income Statement Build up!)
Private and Confidential – Not for Circulation 21
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Shares Outstanding Schedule - Sample
Input historical shares outstanding information
Private and Confidential – Not for Circulation 22
Note: This schedule is commonly integrated with the Equity Schedule
Inputs
Calculations
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Shares Outstanding Schedule - Sample
Calculate forecasted basic shares
Reference shares repurchased and new shares issued for options exercised
Private and Confidential – Not for Circulation 23
Calculations
Referenced
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Shares Outstanding Schedule - Sample
Calculate forecasted diluted shares
Calculate average basic shares
Make reasonable assumptions of options exercised effects
Calculate average diluted shares
Private and Confidential – Not for Circulation 24
Assumption
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Shares Outstanding Schedule - Sample
Link up forecasted diluted weighted average shares outstanding to Income Statement
Private and Confidential – Not for Circulation 25
Referenced to Shares
Outstanding Schedule
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Debt and Interest
Income Statement – interest expense/ income are incomplete at this stage
Balance Sheet – cash and debt items are incomplete at this stage
Cash Flow Statement –
Calculate cash flow from operating and investing activities
Calculate cash flow from available financing activities
Calculate ending cash balance
Link up with Balance Sheet
Private and Confidential – Not for Circulation 26
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The Cash Flow Statement
Cash Flow from Operating Activities
Net Income
Add: Non Cash Charges/ Incomes
Add: Change in Working Capital
Add: Change in LT assets/ liabilities
Private and Confidential – Not for Circulation 27
Cash Flow from Investing Activities
Capital Expenditures
Add: Proceeds from Asset Sales
Add: Additions to Intangibles
Add: Business Acquisitions
Cash Flow from Financing Activities
Available Cash Flow is used for:
Repayment of Debt, payment of dividend, repurchase of equity, maintain higher cash balances
Cash flow deficit is funded by”
Revolving debt, issuance of LT debt, issuance of equity, cash balances
+
Free Cash Flow Available for
Financing Activities
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Change in Cash – Schematic Diagram
Cash Flow from Operating Activities
Private and Confidential – Not for Circulation 28
Add: Effects of Ex. Rates on Cash
Add: Previous year’s Cash Balance
= Ending Cash Balance
+
Net Cash Flow
Cash Flow from Operating Activities
Cash Flow from Operating Activities
+
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Cash Flow Statement - Sample
Private and Confidential – Not for Circulation 29
Link up Net Income to the Cash Flow Statement
Calculate Cash Flow from Operating and Investing activities
Calculate Cash Flow Available for Financing Activities
Referenced from
Income Statement
Calculations
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Cash Flow Statement - Sample
Private and Confidential – Not for Circulation 30
Calculate Cash Flow Available for Financing Activities and Net Change in Cash
Calculations
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Cash Flow Statement - Sample
Reference “beginning cash balance” from the Balance Sheet
Private and Confidential – Not for Circulation 31
Reference from BS
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Cash Flow Statement - Sample
Forecasted Cash is yet to be linked – this will be done later in the model
Private and Confidential – Not for Circulation 32
Excel reads
blank cells as Zero
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Cash Flow Statement - Sample
Calculate Ending Cash Balance
Private and Confidential – Not for Circulation 33
Calculations
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Cash Flow Statement - Sample
Link up “ending cash balance” to the Balance Sheet
Private and Confidential – Not for Circulation 34
Referenced
from Cash Flow
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Illustrative Flow of Funds
Private and Confidential – Not for Circulation 35
Linking up the Core Statements
Income
Statement
Cash Flow
Statement
Balance
Sheet
Working
Capital
Sales
COGS
Change in WC
Working Capital
PP & E,
Depreciation
Depreciation
Intangibles,
Amortization
Am
ort
ization
Intangibles
Am
ort
ization
Other Long
Term Items
Shareholder’s
Equity
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