FINANCIAL MODELING

BUSI 584
Mustafa N. Gltekin
Fall 2014


Introduction
Course Overview
Review of the Schedule
Overview of Financial Modeling

Next Class:
Financial Modeling:
Preliminaries
Research Tools & Resources
Introduction to Capital Market Lab Resources
Web based sources
Agenda August 20, 2014
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Instructor: Mustafa N. Gltekin
Office: McColl 4112
gultekin@unc.edu
962-3153 962-2068 fax
Executive in
Residence: Debra Drumheller
Debra_Drumheller@kenan-flagler.unc.edu

Office hours: MW 1:30-12:30 and by Appointment
Classroom: McColl Capital Markets Lab

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Overview
This is a finance course
Not a course on Excel
Proficiency in spreadsheet use is necessary
Main focus is on financial decision making under
uncertainty by the
Management
Outsiders
Consultants
Investors
This is a demanding course!

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Course Objectives
Develop skills in designing & building financial model
of a company

Ultimate goal is help & guidance in decision
making

Financial planning & forecasting

Valuation & evaluation of firm performance

Risk management
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Course Objectives
Develop skills in designing & building financial model
of a company

Ultimate goal is help & guidance in decision
making

Financial planning & forecasting

Valuation & evaluation of firm performance

Risk management
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Course Objectives
Developing long-lasting skills in building financial
models

Ability to recognize hidden assumptions of models
build by others

Integrating skills learned so far

Valuation!

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Who should take this course?
If you aspire to pursue an investment banking
career

If you want to be a powerful security analyst

If you want to pursue consulting career

If you want to be an entrepreneur

And, if you want to excel in other finance courses
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Evaluation
Assignments (20%).
Case briefs
Reports should not be more than 2 pages. You may
include your supporting documents in an appendix
Reasonable margins (~1) & fonts (10-12) please!
Assignments will be graded on a scale of 0
(unacceptable) to 10 (excellent)
You may work in groups
Up to five members per team
You may be a member of a different team for each assignment

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Evaluations - continued
Take-home Exams (45%)
Based on a simplified real world case
Part I (15%) : Building the model
Objective: Apply Financial Modeling skills learned in a controlled
environment
Part II (30%): Full model with Valuation &
Recommendations (Sensitivity Analysis or Monte Carlo
Simulations is a bonus)
Objective: To master Financial Modeling & Valuation

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Evaluation - continued
Term-Project (25%) (Details will be posted on Canvas)
Best way to immerse yourself in Financial Modeling
Best way to learn is by doing
Kenan-Flagler Financial Modelers (KFFM).
You will be an analyst in KFFM and build a financial model for a
client
I will function as the research department
If you aspire for the A
Valuation of a company
Build an Integrated Valuation Model
Buy side analysts perspective with a detailed model and sell side analysts
polished report
Consultants perspective -
Objective: Master every aspect of Financial Modeling!
Detailed requirements & deadlines for each step will be posted as we progress
Do not underestimate time requirements! It is not something you can do it in a
week!

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Evaluations - Continued
Peer Evaluations & Class Participation (10%)
Basis of allocating points for group work & recognizing
student contribution to class

Bloomberg Certification (5%)
You must successfully complete two sections

Schedule regular meetings with me
To get detailed and timely feedback on your work
Its best to review the materials in small groups!

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Computer Usage Policy in Class
No laptops during the regular class sessions except
during hands-on sessions

You do not need to have a computer or access to a
computer during the class

It is distracting

No cellphones!

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Course Materials: Software & Data
Microsoft Excel
Make sure that Analysis ToolPak & Report Manager
are active
FactSet, Bloomberg, & resources available in
CML
Optional:
Decision Tools Suite
@RISK
BestFist
RiskView
Precision Tree
Crystal Ball
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Course Materials & Teaching Notes
Course Site on Canvas
All class materials & notes will be posted here
Check before each class for posted notes & print them if
you would like to add your own notes
Dropbox
It is a depository for cases & readings
Materials that cannot be posted on Canvas will be posted here
Invitation to join the Dropbox will be send to emails
posted on Connect Carolina unless you specify an
alternative email

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Reference Text Books
VALUATION: Measuring and Managing the Value of Companies, 5
th

Edition by T. Koller and M. Goedhart, and D. Wessels (John Wiley,
2010).

FINANCIAL MODELING: Using Excel and VBA, C. Sengupta, (Wiley,
2004)

FINANCIAL MODELING, 2
nd
Edition by S. Benninga, (MIT Press, 2001)

CORPORATE FINANCE, by R. Ross, R. Westerfield, and J. Jaffe,
(McGraw-Hill).

BEST PRACTICES FOR EQUITY RESEARCH ANALSYSTS, by J.J.
Valentine (McGraw-Hill, 2011)

INTERNATIONAL FINANCIAL STATEMENT ANALYSIS, T. Robinson,
H. Van Greuning, E. Henry, and M. Broihanh, (Wiley, 2008)



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If You Want to be an Excel Wizard
Books by John Walkenbach
Excel 20xx Bible
Excel 20xx Power Programming with VBA
Many Free-bees at his web site
http://www.j-walk.com/

Books by Stephen Bullen & his Company Web site:
http://www.oaltd.co.uk
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Schedule Subject to change. Consult
class notes for readings & assignments
SESSIONS TOPICS
2-7
Resources Available for Research

Review of Resources & Programs in Capital Market Lab (CML)

Web based sources via UNC


Financial Statement Modeling - Preliminaries

Best Excel Practices

Financial Statement Analysis I

Introduction to Integrated Financial Statement Modeling
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Schedule - continued
SESSIONS TOPICS
7-19
II. FINANCIAL MODELING
Preparing Pro-forma Financial Statements &
Schedules
Core Statements
Working Capital
Depreciation & Amortization Schedules
Equity & Debt Schedules
Cash Flow Statements
Sensitivity Analysis
Scenario Analysis
Decision Tables
Financial Modeling under Uncertainty
Monte Carlo Simulations
Financial Statement Analysis II
Estimating Future Performance
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Schedule - continued
SESSIONS TOPICS
20-28 III. VALUATION THEORY & APPLICATIONS
Capital Structure & Valuation
Valuation Theory & Rates of Return
Adjusted Present Value (APV) Method
Estimating Discount Rates
Alternative Methods of Estimating Terminal Value
Simple Growth Models
Multistage Growth Models
Relative Valuation
LBO Valuation
Introduction to Real Options
Real World Applications
Integrated Financial Model and Valuation of a
Publicly Traded Company
Term Project Presentations
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What is a financial model?
Virtual re-creation of the actual business
where:

All the decisions and outcomes are quantified
and reflected in financial statements

Performance is measured

Facilitates financial analysis

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Financial Modeling
Different types of models serve different purposes
and users
Model is based on historical performance and
assumptions about future performance
Model will project financial statements to the level
of detail tailored for your purpose
Future performance derived from model is analyzed
in different ways by different parties
It is critical to understand what purpose your model
ultimately intents to serve
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Purpose of the model
Equity Research
Focus on future performance in terms of its implications on the
companys stock price
Credit Research
Focus on companys financial health (ability to service debt, cash
flow, credit statistics,..)
Investment Banking
Earnings projections represent the core of most valuation analysis
Intrinsic value valuation methods incorporate forward earnings/cash
flow projections
Merger consequences analysis incorporates forward projections
Accretion/dilution earnings impact of an acquisition
Projections allow bankers to determine financial flexibility
Ability to make an acquisition through excess cash or raising more debt,
issuing equity etc.
Credit bankers focus on ability to pay down debt, companys financial
risk, using forward credit metrics
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Benefits of Modeling
Building a good model requires a combination of
various skills
Accounting
Corporate Finance
Industry knowledge
Company knowledge
Excel
In the process of building a model you learn more
about what you dont know!

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Types of Models
Discrete

Continuous
Prescriptive
(Determining an optimal
policy)
Descriptive
(Describe relationship &
provide information for
evaluation)
Deterministic

Closed form solutions exists

Spreadsheets &
Sensitivity Analysis
Probabilistic

Closed form solutions may be
possible

Spreadsheets (limited) &
Simulation Models
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Simulation
Is the process of building a mathematical or logical
model of a system or a decision problem, and
experimenting with the model to obtain insights into
the systems behavior or to assist in solving the
decision problem
Why use simulations?
Problem does not meet the assumptions required by
analytical modeling approaches
Interactions of variables are too complex to be analytically
tractable
Monte Carlo Simulation:
A sampling experiment to estimate the distribution of an
outcome variable that depends on several probabilistic input
variables
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