Mastering Financial Modelling in Microsoft Excel

Alastair Day has worked in the finance industry for 20 years in treasury and marketing functions. He is an associate lecturer in corporate finance with the OUBS, and other publications include books such as The Financial Director's Guide to Purchasing Leasing.

Contents

Introduction who needs this book?

Preface to the second edition

Acknowledgements

Conventions

Executive summary

Part A DEVELOPING FINANCIAL MODELS



1 Overview

Introduction

What is financial modelling?

History of spreadsheets

Power of spreadsheets

Objectives for the book

Example spreadsheet

Summary



2 Design introduction

Introduction

Basics of design

Objectives

User interface

Key variables and rules

Layout

Individual modules

Menu structure and macros

Management reporting

Future development

Testing

Protection

Documentation

Peer group comments

Summary



3 Features and techniques

Introduction

Formats

Number format

Lines and borders

Colours and patterns

Specific colours for inputs and results

Data validation

Controls combo boxes and buttons

Conditional formatting

Use of functions and types of function

Add-ins for more functions

Text and updated labels

Record a version number, author, etc.

Use names to make formulas easier to understand

Paste names as part of documentation

Comment cells

Graphics

Dynamic graphs to plot individual series

Data tables

Scenarios

Goal seek

Solver

Use of templates

Summary



4 Sample model

Introduction

Aims and objectives

User needs and user interface

Key variables and rules

Breaking down the calculations into manageable groups

Setting up individual modules

Menu structure

Program sheets and macros

User assistance

Summaries

Risk and multiple answers

Testing and troubleshooting

Protecting and securing

Help and documentation

Show to peers take their advice

Control loop listen, learn and modify

Summary



5 Example model

Introduction

Case study

Design

PPP 1

PPP 2

PPP 3

PPP 4

PPP 5

Documenting, testing and protecting

PPP 6

Summary



Part B APPLICATIONS



6 Analysing performance

Introduction

Profit and loss

Balance sheet

Ratios

Trend analysis

Sustainability

Summary



7 Cash flow



Deriving cash flow

Net operating cash flow (NOCF)

Free cash flow

Cover ratios

International cash flow

Summary



8 Forecasting models

Introduction

Historic forecasts

Trend lines

Trend lines for analysis

Data smoothing

Cyclicality and seasonality

Summary



9 Forecasting financials

Introduction

Key drivers

Deriving financial statements

Alternative approaches

Financial analysis

Summary



10 Variance analysis

Introduction

Cash flow budgets

Monthly cash model

'Flash' report and graphics

Summary



11 Breakeven analysis

Introduction

Breakeven

Operating leverage

Financial leverage

Combined leverage

Summary





12 Portfolio analysis

Introduction

Formulas

Optimum portfolio



13 Cost of capital

Introduction

Capital Asset Pricing Model

Dividend growth model

Cost of preference shares

Cost of debt

Weighted average cost of capital

Marginal WACC

Summary



14 Bonds

Introduction

Cash flows

Yield measures

Duration

Portfolio results

Summary



15 Investment analysis

Introduction

Investment model revisited

Payback period

Accounting return

Net present value

Internal rate of return

Benefit/cost ratio

Management tests cash flow, etc.

Scenarios

Sensitivity analysis and charts

Capital rationing

Summary



16 Risk Analysis



Introduction

Risk assessment process and analysis

Risk adjusted rate  iation

Coefficient of variation

Certainty equivalents

Real options

Simulation

Summary



17 Depreciation

Introduction

Straight line

Sum of digits

Declining balance

US MACRS

Amortisation

Comparison

Summary



18 Leasing

Introduction

Rental calculations

Lease versus purchase

Classification

Accounting

Settlements

Summary



19 Company valuation

Introduction

Accounts

Adjusted accounting value

Dividends

Stock market or market method

Free cash flows

Summary



20 Optimisation

Introduction

Elements of optimisation models

Linear programming

Margin maximisation

Pensions

Summary



21 Decision trees

Introduction

Bayes' theorem

Terminology

Decision tree model

Information example

Summary



22 Risk management

Introduction

Forward rate agreements

Swaps

Foreign exchange

Futures

Options

Black-Scholes

Summary



23 Data functions

Introduction

Dataset

Database functions

Descriptive statistics

Histogram

Function output

Box plots

Summary



24 Data analysis

Introduction

Imported data

Sort

Filter

Subtotals

Pivot table and chart

Database import

Radar chart

Gauge chart

Summary



25 Modelling checklist

Introduction

Design summary

Features

Techniques



Appendices

Appendix 1: Software installation

Appendix 2: Licence

Appendix 3: File list

Appendix 4: Microsoft Office 2007 (Office 12)

Bibliography and references

Index