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Session 1

The document discusses financial modeling including definitions, types of models, the modeling process, and building a model. Financial modeling is represented mathematically to predict earnings and answer hypothetical questions. Common types are three statement, discounted cash flow, comparative and M&A models. Steps include defining the problem, variables, users, aspects, design, building, testing, documenting and updating the model.

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Huyen Cao Thi Thanh
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14 views21 pages

Session 1

The document discusses financial modeling including definitions, types of models, the modeling process, and building a model. Financial modeling is represented mathematically to predict earnings and answer hypothetical questions. Common types are three statement, discounted cash flow, comparative and M&A models. Steps include defining the problem, variables, users, aspects, design, building, testing, documenting and updating the model.

Uploaded by

Huyen Cao Thi Thanh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Corporate Finance: Financial Modelling

Session 1

The Introduction
Lecturer
Hong Ngoc Nguyen, MSc.
hongngoc.nguyen@isb.edu.vn

All emails should insert “[CFX_S22023]” at the start of subject.

Please remember to include this [ ]!

2
Contents

I. Introduction to Financial
modelling
II. The use of Excel (Students)

3
Definition?
Wikipedia considers a financial model to be a mathematical model that
represents the performance of a financial asset, project, or other investments in
abstract form.
Corporate Finance Institute believes that a financial model facilitates the
forecasting of future financial performance, by utilizing certain variables to
estimate the outcome of specific financial decisions.
Business Dictionary agrees with the notion of a mathematical model in that it
comprises sets of equations. The model analyses how an entity will react to
different economic situations with a focus on the outcome of financial decisions.

4
Definition?
eFinance Management considers a financial model to be a tool with which the
financial analyst attempts to predict the earnings and performance of future
years.

My simple - practical definition:


A financial model is designed to represent in mathematical terms the
relationships among the variables of a financial problem so that it can be used
to answer “what if” questions or make projections.

5
Types of financial models
The 3-statement model
◦ Balance sheet

6
7
Types of financial models
The 3-statement model
◦ Balance sheet
◦ Income statement

8
9
Types of financial models
The 3-statement model
◦ Balance sheet
◦ Income statement
◦ Cash flow statement

10
11
Types of financial models
The 3-statement model
◦ Balance sheet
◦ Income statement
◦ Cash flow statement
The discounted cash flow model
The comparative companies model
The merger and acquisition model
Loan repayment schedule

12
Stages of the Modelling Process

13
Backward thinking and forward
calculation processes

14
Steps for Building a Financial Model
Step 1: Define and Structure the Problem
Step 2: Define the Input and Output Variables of the
Model
Step 3: Decide Who Will Use the Model and How Often
Step 4: Understand the Financial and Mathematical
Aspects of the Model
Step 5: Design the Model

15
Steps for Building a Financial Model (cont.)
Step 6: Create the Spreadsheets or Write the VBA Codes
Step 7: Test the Model
Step 8: Protect the Model
Step 9: Document the Model
Step 10: Update the Model as Necessary

16
Group activities (20 mins)
Please discuss in your group and identify:
◦ 3 benefits of using the financial model
◦ 3 challenges of using the financial model
◦ Choose 2 listed firms related to your assigned industry:
◦ 1 & 2: Construction
◦ 3 & 4: Manufacturer
◦ 5, 6 & 7: Agriculture
◦ For each firm, answer:
◦ Where is the firm’s head quarter?
◦ When was the firm founded?
◦ Which stock exchange?
◦ Where to get firm’s financial statements?

17
Benefits
◦ Providing Numerical Information
◦ Capturing Influencing Factors and Relationships
◦ Generating Insight and Forming Hypotheses
◦ Decision Levers, Scenarios, Uncertainties, Optimisation,
Risk Mitigation and Project Design
◦ Improving Working Processes, Enhanced
Communications and Precise Data Requirements

18
Challenges
◦ The Nature of Model Error
◦ Inherent Ambiguity and Circularity of Reasoning
◦ Inconsistent Scope or Alignment of Decision and Model
◦ The Presence on Biases, Imperfect Testing, False
Positives and Negatives
◦ Balancing Intuition with Rationality
◦ Lack of Data or Insufficient Understanding of a Situation

19
“Plans are useless, but planning is everything”
(Eisenhower).
“Every model is wrong, some are useful” (Box).
“Perfection is the enemy of the good”
(Voltaire).

20
Group home work
Please choose one listed firm and collect all the
information for its 3-statement model for the most three
recent years:
+ Balance Sheet
+ Income Statement
+ Cashflows statement

21

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