Financial Modeling Examples

Various financial modeling examples are different in type and

complexity as the situation demands. They are widely used for
valuation, sensitivity analysis, and comparative analysis. There are
other uses, like risk prediction, pricing strategy, effects of synergies,
etc. Different examples cater to their own set of specialties,
requirements, and users.
Following are some of the examples that are widely used in the
Finance Industry:

Example #1 – Full-Blown Three Statement

Financial Modeling:

 This type of financial Model represents the complete economic

scenario of a company and projections. This is the most standard
and in-depth form.
 As the name suggests, the Model is a structure of all the three
financial statements (Income Statement, Balance Sheet, and Cash
Flow Statement) of a company interlinked together.
 There are also schedules supporting the data. (Depreciation
schedule, debt schedule, working capital calculation schedule, etc.).
 The interconnectivity of this Model sets it apart, which allows the
user to tweak the inputs wherever and whenever required, which
then immediately reflects the changes in the entire Model.
 This feature helps us to get a thorough understanding of all the
components in a model and its effects thereof.
 The actual uses of this Model are forecasting and understanding
trends with the given set of inputs.
 Historically the Model can stretch back as long as the conception of
the company and forecasts can try up to 2-3 years depending
requirement.

Example #2 Discounted Cash Flow (DCF) Model:

Through this financial Model, you will learn Alibaba’s 3 statement
forecasts, interlinkages, DCF Model – FCFF Formula, and Relative
Valuation.

 The most widely used method of valuation in the finance industry is

the Discounted Cash Flow analysis method, which uses the concept
of Time Value of Money.
 The concept working behind this method says that the value of the
company is the net present value (NPV) of the sum of the future
cash flows generated by the company discounted back today.
 The discounting factor does the discounting of the projected future
cash flows. One rather important mechanic in this method is
deriving the ‘discounting factor.’ Even the slightest error in
calculating the discounting factor can lead to enormous amounts
of change in the results obtained.
 Usually, the Weighted Average Cost of Capital (WACC) of a
company is used as the discounting factor to discount the future
cash flows.
 DCF helps to identify whether a company’s stock is overvalued or
undervalued. This proves to be a rather important decision making
factor in case of investment scenarios.
 In simplicity, it helps to determine the attractiveness of an
investment opportunity. If the NPV of the sum of future cash flows
is more significant than its current value, then the option is
profitable, or else it is an unprofitable deal.
 The reliability of a DCF model is vital as it is calculated on the base
of Free Cash Flow, thus eliminating all the factors of expenses and
only focusing on the freely available cash to the company.
 As DCF involves the projection of future cash flows, it is usually
suited for working on financials of big organizations, where the
growth rates and financials have a steady trend.

Example #3 Leveraged Buyout (LBO) Model:

 In a leveraged buyout deal, a company acquires other companies
by using borrowed money (debt) to meet the acquisition costs. The
cash flows from the assets and operations of the acquired company
are used to pay off the debt and its charges.
 Hence, LBO is termed as a very hostile/aggressive way of acquisition
as the target company is not taken under the sanctioning process of
the deal.
 Usually, cash-rich Private Equity firms are seen to be engaged in
LBO’s. They acquire the company with a combination of Debt &
Equity (where a majority is of debt, almost above 75%) and sell off
after gaining substantial profit after a few years (3-5 years)
 So the purpose of an LBO model is to determine the amount of
profit that can be generated from such kind of a deal.
 As there are multiple ways debt can be raised, each having specific
interest payments, these models have higher levels of complexity.
 The following are steps that go into making an LBO model;
o Calculation of purchase price based on forward trading
multiple on EBITDA
o Weightage of debt and equity funding for the acquisition
o Building a projected income statement and calculate EBITDA
o Calculation of cumulative FCF during the total tenure of LBO
o Calculating Ending exit values and Returns through IRR.

Example #4 Merger & Acquisition (M&A) model:

 The M&A model helps to figure out the effect of merger or
acquisition on the earnings per share of the newly formed
company after the completion of the restructuring and how it
compares with the current EPS.
 If the EPS increases altogether, then the transaction is said to be
“accretive,” and if the EPS decreases than the current EPS, the
transaction is said to be “dilutive.”
 The complexity of the model varies with the type and size of
operations of the companies in question.
 Investment Banking, corporate financing companies generally use
these models.
 The following are steps that go into making an M&A model;
o Valuing Target & Acquirer as standalone firms
o Valuing Target & Acquirer with synergies
o Working out an Initial offer for the target firm
o Determining combined firms ability to finance transaction
o Adjust cash/debt according to the ability to finance the transaction
o Calculating EPS by combining Net income and figuring out an
accretive/dilutive situation.

Example #5 Sum-of-the-parts (SOTP)

 Valuing of huge conglomerates becomes challenging to value the
company as a whole with one single valuation method.
 So, valuation for the different segments is carried out separately by
suitable valuation methods for each element.
 Once all the segments are valued separately, the sum of valuations
is added together to get the valuation of the conglomerate as a
whole.
 Hence, it is called the “Sum-of-the-parts” valuation method.
 Usually, SOTP is suitable in the case of a spin-off, mergers,
Equity carve-outs, etc.

Example #6 Comparative Company Analysis

model:
 Analysts, while working on a comparative valuation analysis of a
company looking for other similar companies that are equal in
terms of size, operations, and peer group companies.
 By looking at the numbers of its peers, we get a ballpark figure for
the valuation of the company.
 It works on the assumption that similar companies will have
comparable EV/EBITDA and other valuation multiples.
 It is the most basic form of valuation done by analysts in their firms.

Example #7 – Comparable Transaction Analysis

Model
 The transaction multiples Model is a method where we look at the
past Merger & Acquisition (M&A) transactions and value a
comparable company using precedents. The steps involved are as
follows –

 Step 1 – Identify the Transaction

 Step 2 – Identify the right transaction multiples
 Step 3 – Calculate the Transaction Multiple Valuation