A B C D E

1 SETTING UP THE FINANCIAL STATEMENT MODEL

2 Sales growth 10%
3 Current assets/Sales 15%
4 Current liabilities/Sales 8%
5 Net fixed assets/Sales 77%
6 Costs of goods sold/Sales 50%
7 Depreciation rate 10%
8 Interest rate on debt 10.00%
9 Interest paid on cash and marketable securities 8.00%
10 Tax rate 40%
11 Dividend payout ratio 40%
12
13 Year 0 1 2 3
14 Income statement
15 Sales 1,000 1,100 1,210 1,331
16 Costs of goods sold (500) (550) (605) (666)
17 Interest payments on debt (32) (32) (32) (32)
18 Interest earned on cash and marketable securities 6 9 14 20
19 Depreciation (100) (117) (137) (161)
20 Profit before tax 374 410 450 492
21 Taxes (150) (164) (180) (197)
22 Profit after tax 225 246 270 295
23 Dividends (90) (98) (108) (118)
24 Retained earnings 135 148 162 177
25
26 Balance sheet
27 Cash and marketable securities 80 144 213 289
28 Current assets 150 165 182 200
29 Fixed assets
30 At cost 1,070 1,264 1,486 1,740
31 Depreciation (300) (417) (554) (715)
32 Net fixed assets 770 847 932 1,025
33 Total assets 1,000 1,156 1,326 1,513
34
35 Current liabilities 80 88 97 106
36 Debt 320 320 320 320
37 Stock 450 450 450 450
38 Accumulated retained earnings 150 298 460 637
39 Total liabilities and equity 1,000 1,156 1,326 1,513
40 0.53
41 Current Ratio 1.88
42 Acid Test Ratio 1.88
43 Gross Profit Margin 0.50
44 Net Profit Margin 0.13
45 ROE 4.45
46 ROA 7.42
47 ROCE
48 Total Debt to Equity 0.71
49 Total Debt to Total Assets 0.32
 A B C D E
50 Self Financing Ratio
51 Cash Flow Ratio
 F G H
1
2
3
4
5
6
7
8
9
10
11
12
13 4 5 6
14
15 1,464 1,611 1,772
16 (732) (805) (886)
17 (32) (32) (32)
18 26 33 40
19 (189) (220) (255)
20 538 587 639
21 (215) (235) (256)
22 323 352 383
23 (129) (141) (153)
24 194 211 230
25
26
27 371 459 554
28 220 242 266
29
30 2,031 2,364 2,743
31 (904) (1,124) (1,379)
32 1,127 1,240 1,364
33 1,718 1,941 2,183
34
35 117 129 142
36 320 320 320
37 450 450 450
38 830 1,042 1,272
39 1,718 1,941 2,183
40
41
42
43
44
45
46
47
48
49
 A B C D
1 FIRST FINANCIAL MODEL
2 Sales growth 10%
3 Current assets/Sales 15%
4 Current liabilities/Sales 8%
5 Net fixed assets/Sales 77%
6 Costs of goods sold/Sales 50%
7 Depreciation rate 10%
8 Interest rate on debt 10.00%
9 Interest paid on cash and marketable securities 8.00%
10 Tax rate 40%
11 Dividend payout ratio 40%
12
13 Year 0 1 2
14 Income statement
15 Sales 1,000 1,100 1,210
16 Costs of goods sold (500) (550) (605)
17 Interest payments on debt (32) (32) (32)
18 Interest earned on cash and marketable securities 6 9 14
19 Depreciation (100) (117) (137)
20 Profit before tax 374 410 450
21 Taxes (150) (164) (180)
22 Profit after tax 225 246 270
23 Dividends (90) (98) (108)
24 Retained earnings 135 148 162
25
26 Balance sheet
27 Cash and marketable securities 80 144 213
28 Current assets 150 165 182
29 Fixed assets
30 At cost 1,070 1,264 1,486
31 Depreciation (300) (417) (554)
32 Net fixed assets 770 847 932
33 Total assets 1,000 1,156 1,326
34
35 Current liabilities 80 88 97
36 Debt 320 320 320
37 Stock 450 450 450
38 Accumulated retained earnings 150 298 460
39 Total liabilities and equity 1,000 1,156 1,326
40
41
42 Year 0 1 2
43 Free cash flow calculation
44 Profit after tax
45 Add back depreciation
46 Subtract increase in current assets
47 Add back increase in current liabilities
48 Subtract increase in fixed assets at cost
 A B C D
49 Add back after-tax interest on debt
50 Subtract after-tax interest on cash and+A14 mkt. securities
51 Free cash flow
52
53 CONSOLIDATED STATEMENT OF CASH FLOWS: RECONCILING THE CASH BAL
54 Cash flow from operating activities
55 Profit after tax
56 Add back depreciation
57 Adjust for changes in net working capital:
58 Subtract increase in current assets
59 Add back increase in current liabilities
60 Net cash from operating activities
61
62 Cash flow from investing activities
63 Aquisitions of fixed assets--capital expenditures
64 Purchases of investment securities
65 Proceeds from sales of investment securities
66 Net cash used in investing activities
67
68 Cash flow from financing activities
69 Net proceeds from borrowing activities
70 Net proceeds from stock issues, repurchases
71 Dividends paid
72 Net cash from financing activities
73
74 Net increase in cash and cash equivalents
75 Check: changes in cash and mkt. securities
 E F G H
ODEL 1
2
3
4
5
6
7
8
9
10
11
12
13 3 4 5
14
15 1,331 1,464 1,611
16 (666) (732) (805)
17 (32) (32) (32)
18 20 26 33
19 (161) (189) (220)
20 492 538 587
21 (197) (215) (235)
22 295 323 352
23 (118) (129) (141)
24 177 194 211
25
26
27 289 371 459
28 200 220 242
29
30 1,740 2,031 2,364
31 (715) (904) (1,124)
32 1,025 1,127 1,240
33 1,513 1,718 1,941
34
35 106 117 129
36 320 320 320
37 450 450 450
38 637 830 1,042
39 1,513 1,718 1,941
40
41
42 3 4 5
43
44
45
46
47
48
 E F G H
49
50
51
52
: RECONCILING
53 THE CASH BALANCES
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
 NEGATIVE CASH BALANCES: ILLUSTRATION
Sales growth 20% <-- Increased from 10%
Current assets/Sales 20% <-- Increased from 15%
Current liabilities/Sales 8%
Net fixed assets/Sales 80% <-- Increased from 77%
Costs of goods sold/Sales 50%
Depreciation rate 10%
Interest rate on debt 10.00%
Interest paid on cash and marketable securities 8.00%
Tax rate 40%
Dividend payout ratio 50% <-- Increased from 40%

Year 0 1 2 3 4
Income statement
Sales 1,000 1,200 1,440 1,728 2,074
Costs of goods sold (500) (600) (720) (864) (1,037)
Interest payments on debt (40) (40) (42) (47) (56)
Interest earned on cash and marketable securities 6 4 1 - -
Depreciation (100) (124) (156) (194) (242)
Profit before tax 366 440 524 622 739
Taxes (147) (176) (209) (249) (296)
Profit after tax 220 264 314 373 443
Dividends (110) (132) (157) (187) (222)
Retained earnings 110 132 157 187 222

Balance sheet
Cash and marketable securities 80 28 - - -
Current assets 200 240 288 346 415
Fixed assets
At cost 1,100 1,384 1,732 2,157 2,675
Depreciation (300) (424) (580) (774) (1,016)
Net fixed assets 800 960 1,152 1,382 1,659
Total assets 1,080 1,228 1,440 1,728 2,074

Current liabilities 80 96 115 138 166

Debt 400 400 436 514 610
Stock 450 450 450 450 450
Accumulated retained earnings 150 282 439 626 847
Total liabilities and equity 1,080 1,228 1,440 1,728 2,074

Year 0
Free cash flow calculation
Profit after tax
Add back depreciation
Subtract increase in current assets
Add back increase in current liabilities
Subtract increase in fixed assets at cost
Add back after-tax interest on debt
Subtract after-tax interest on cash and mkt. securities
Free cash flow
 5

2,488
(1,244)
(67)
-
(299)
878
(351)
527
(263)
263

-
498

3,306
(1,315)
1,991
2,488

199
728
450
1,111
2,488
 A B C D E
1 NO NEGATIVE CASH BALANCES
2 Sales growth 20% <-- Increased from 10%
3 Current assets/Sales 20% <-- Increased from 15%
4 Current liabilities/Sales 8%
5 Net fixed assets/Sales 80% <-- Increased from 77%
6 Costs of goods sold/Sales 50%
7 Depreciation rate 10%
8 Interest rate on debt 10.00%
9 Interest paid on cash and marketable securities 8.00%
10 Tax rate 40%
11 Dividend payout ratio 50% <-- Increased from 40%
12
13 Year 0 1 2 3
14 Income statement
15 Sales 1,000 1,200 1,440 1,728
16 Costs of goods sold (500) (600) (720) (864)
17 Interest payments on debt (40) (40) (42) (47)
18 Interest earned on cash and marketable securities 6 4 1 -
19 Depreciation (100) (124) (156) (194)
20 Profit before tax 366 440 524 622
21 Taxes (147) (176) (209) (249)
22 Profit after tax 220 264 314 373
23 Dividends (110) (132) (157) (187)
24 Retained earnings 110 132 157 187
25
26 Balance sheet
27 Cash and marketable securities 80 28 - -
28 Current assets 200 240 288 346
29 Fixed assets
30 At cost 1,100 1,384 1,732 2,157
31 Depreciation (300) (424) (580) (774)
32 Net fixed assets 800 960 1,152 1,382
33 Total assets 1,080 1,228 1,440 1,728
34
35 Current liabilities 80 96 115 138
36 Debt 400 400 436 514
37 Stock 450 450 450 450
38 Accumulated retained earnings 150 282 439 626
39 Total liabilities and equity 1,080 1,228 1,440 1,728
40
41 Year 0 1 2 3
42 Free cash flow calculation
43 Profit after tax
44 Add back depreciation
45 Subtract increase in current assets
46 Add back increase in current liabilities
47 Subtract increase in fixed assets at cost
48 Add back after-tax interest on debt
49 Subtract after-tax interest on cash and mkt. securities
 A B C D E
50 Free cash flow
 F G H
CASH BALANCES
1
2
3
4
5
6
7
8
9
10
11
12
13 4 5
14
15 2,074 2,488
16 (1,037) (1,244)
17 (56) (67)
18 - -
19 (242) (299)
20 739 878
21 (296) (351)
22 443 527
23 (222) (263)
24 222 263
25
26
27 - -
28 415 498
29
30 2,675 3,306
31 (1,016) (1,315)
32 1,659 1,991
33 2,074 2,488
34
35 166 199
36 610 728
37 450 450
38 847 1,111
39 2,074 2,488
40
41 4 5
42
43
44
45
46
47
48
49
 A B C D E

1
TARGET DEBT-EQUITY RATIO
Cash is fixed, ratio of debt/equity changes in each year
2 Sales growth 10%
3 Current assets/Sales 15%
4 Current liabilities/Sales 8%
5 Net fixed assets/Sales 77%
6 Costs of goods sold/Sales 50%
7 Depreciation rate 10%
8 Interest rate on debt 10.00%
9 Interest paid on cash & marketable securities 8.00%
10 Tax rate 40%
11 Dividend payout ratio 60%
12
13 Year 0 1 2 3
14 Income statement
15 Sales 1,000 1,100 1,210 1,331
16 Costs of goods sold (500) (550) (605) (666)
17 Interest payments on debt (32) (30) (29) (28)
18 Interest earned on cash & marketable securities 6 6.40 6.40 6.40
19 Depreciation (100) (116.68) (137.48) (161.31)
20 Profit before tax 374 409 445 483
21 Taxes (150) (164) (178) (193)
22 Profit after tax 225 246 267 290
23 Dividends (135) (147) (160) (174)
24 Retained earnings 90 98 107 116
25
26 Balance sheet
27 Cash and marketable securities 80 80 80 80
28 Current assets 150 165 182 200
29 Fixed assets
30 At cost 1,070 1,264 1,486 1,740
31 Depreciation (300) (417) (554) (715)
32 Net fixed assets 770 847 932 1,025
33 Total assets 1,000 1,092 1,193 1,305
34
35 Current liabilities 80 88 97 106
36 Debt 320 287 284 276
37 Stock 450 469 457 451
Initial (year 0)
38 Accumulated retained earnings debt/equity ratio: 150 248 355 471
39 Total liabilities and equity =B36/(B37+B38) 1,000 1,092 1,193 1,305
40
41 Target debt-equity ratio 0.53 0.40 0.35 0.30
42
43 Year 0 1 2 3
44 Free cash flow calculation
45 Profit after tax
46 Add back depreciation
47 Subtract increase in current assets
 A B C D E
48 Add back increase in current liabilities
49 Subtract increase in fixed assets at cost
50 Add back after-tax interest on debt
51 Subtract after-tax interest on cash & mkt. securities
52 Free cash flow
 F G H
ITY RATIO 1
changes in each year
2
3
4
5
6
7
8
9
10
11
12
13 4 5
14
15 1,464 1,611
16 (732) (805)
17 (29) (32)
18 6.40 6.40
19 (188.59) (219.77)
20 521 560
21 (208) (224)
22 313 336
23 (188) (202)
24 125 134
25
26
27 80 80
28 220 242
29
30 2,031 2,364
31 (904) (1,124)
32 1,127 1,240
33 1,427 1,562
34
35 117 129
36 302 331
37 412 372
38 596 730
39 1,427 1,562
40
41 0.30 0.30
42
43 4 5
44
45
46
47
 A B C D E

1
PROJECT FINANCE
No dividends, debt repayment schedule fixed, net fixed assets consta
2 Sales growth 15%
3 Current assets/Sales 15%
4 Current liabilities/Sales 8%
5 Costs of goods sold/Sales 45%
6 Depreciation rate 10%
7 Interest rate on debt 10.00%
8 Interest paid on cash and marketable securities 8.00%
9 Tax rate 40%
10 Dividend payout ratio 0% <-- No dividends until all the debt is paid off
11
12 Year 0 1 2 3
13 Income statement
14 Sales 1,000 1150 1323 1521
15 Costs of goods sold (518) (595) (684)
16 Interest payments on debt (90) (70) (50)
17 Interest earned on cash and marketable securities 1 3 9
18 Depreciation (211) (233) (257)
19 Profit before tax 333 428 539
20 Taxes (133) (171) (216)
21 Profit after tax 200 257 323
22 Dividends - - -
23 Retained earnings 200 257 323
24
25 Balance sheet
26 Cash and marketable securities 0 19 64 173
27 Current assets 200 173 198 228
28 Fixed assets
29 At cost 2,000 2211 2443 2700
30 Depreciation - (211) (443) (700)
31 Net fixed assets 2,000 2,000 2,000 2,000
32 Total assets 2,200 2,192 2,262 2,401
33
34 Current liabilities 100 92 106 122
35 Debt 1,000 800 600 400
36 Stock 1,100 1,100 1,100 1,100
37 Accumulated retained earnings 0 200 456 780
38 Total liabilities and equity 2,200 2,192 2,262 2,401
39
40
41 FREE CASH FLOW CALCULATION
42 Year 0 1 2 3
43 Profit after tax
44 Add back depreciation
45 Subtract increase in current assets
46 Add back increase in current liabilities
47 Subtract increase in fixed assets at cost
 A B C D E
48 Add back after-tax interest on debt
49 Subtract after-tax interest on cash and mkt. securities
50 Free cash flow
51
52
53
54
55
56 RETURN ON EQUITY (ROE)
57 Year 0 1 2 3
58 Equity cash flow
59 RETURN ON EQUITY (ROE)
60
61
62 Data table: ROE as a function of initial
63 equity investment
 F G H

NANCE 1
fixed, net fixed assets constant
2
3
4
5
6
7
8
9
s until all the debt
10 is paid off
11
12 4 5
13
14 1749 2011
15 (787) (905)
16 (30) (10)
17 21 40
18 (284) (314)
19 669 822
20 (268) (329)
21 401 493
22 - -
23 401 493
24
25
26 359 633
27 262 302
28
29 2985 3299
30 (985) (1,299)
31 2,000 2,000
32 2,621 2,935
33
34 140 161
35 200 0
36 1,100 1,100
37 1181 1674
38 2,621 2,935
39
40
41
42 4 5
43
44
45 Cash flow
generated by
46
depreciation equals
47 capital
expenditures.
 Cash flow
generated by
depreciation equals
F G capital H
48 expenditures.
49
50
51
52
53
54
55
56
57 4 5
58
59
60
61
62
63
 A B C D E

1
PROJECT FINANCE
With these parameters the project cannot pay off its debt
2 Sales growth 15%
3 Current assets/Sales 15%
4 Current liabilities/Sales 8%
5 Costs of goods sold/Sales 55%
6 Depreciation rate 10%
7 Interest rate on debt 10.00%
8 Interest paid on cash and marketable securities 8.00%
9 Tax rate 40%
10 Dividend payout ratio 0% <-- No dividends until all the debt is paid off
11
12 Year 0 1 2 3
13 Income statement
14 Sales 1,000 1,150 1,323 1,521
15 Costs of goods sold (633) (727) (836)
16 Interest payments on debt (90) (70) (50)
17 Interest earned on cash and marketable securities (2) (6) (7)
18 Depreciation (211) (233) (257)
19 Profit before tax 215 287 370
20 Taxes (86) (115) (148)
21 Profit after tax 129 172 222
22 Dividends 0 0 0
23 Retained earnings 129 172 222
24
25 Balance sheet
26 Cash and marketable securities 0 (52) (92) (83)
27 Current assets 200 173 198 228
28 Fixed assets
29 At cost 2,000 2,211 2,443 2,700
30 Depreciation 0 (211) (443) (700)
31 Net fixed assets 2,000 2,000 2,000 2,000
32 Total assets 2,200 2,121 2,107 2,145
33
34 Current liabilities 100 92 106 122
35 Debt 1,000 800 600 400
36 Stock 1,100 1,100 1,100 1,100
37 Accumulated retained earnings 0 129 301 523
38 Total liabilities and equity 2,200 2,121 2,107 2,145
 F G H

NANCE 1
ct cannot pay off its debt
2
3
4
5
6
7
8
9
s until all the debt
10 is paid off
11
12 4 5
13
14 1,749 2,011
15 (962) (1,106)
16 (30) (10)
17 (4) 4
18 (284) (314)
19 469 585
20 (187) (234)
21 281 351
22 0 0
23 281 351
24
25
26 (18) 114
27 262 302
28
29 2,985 3,299
30 (985) (1,299)
31 2,000 2,000
32 2,244 2,416
33
34 140 161
35 200 0
36 1,100 1,100
37 804 1,155
38 2,244 2,416