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F Modeling ch-1

Financial modeling involves creating spreadsheets to estimate a company's future cash flows, financing needs, and valuation. It is useful for decision making like assessing new projects or acquisitions. The objectives of financial modeling are to support decisions regarding business plans, project evaluation, resource allocation, and valuation of companies and assets. Financial models abstract real-world situations into mathematical representations to provide decision support, though they always have limitations and require human judgment.

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86 views

F Modeling ch-1

Financial modeling involves creating spreadsheets to estimate a company's future cash flows, financing needs, and valuation. It is useful for decision making like assessing new projects or acquisitions. The objectives of financial modeling are to support decisions regarding business plans, project evaluation, resource allocation, and valuation of companies and assets. Financial models abstract real-world situations into mathematical representations to provide decision support, though they always have limitations and require human judgment.

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fekadegebretsadik478729
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© © All Rights Reserved
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DEBRE BIRHAN University

Financial Modeling (AcFn 3052)

chapter 1:Introduction to Financial


Modeling and Valuation

1. What is financial modeling?


2. Why is financial modeling useful?
3. What is the Objectives of financial modeling?

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Financial Modeling Definition
• A financial model is a spreadsheet-based
abstraction of a real company that helps you:
 estimate the company’s future cash flows, financing
requirements, and valuation
whether or not you should invest in the company
• models are also used to assess the viability of
acquisitions and the development of new assets.

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useful of financial modeling
 Financial modeling is a representation in numbers of a company's
operations in the past, present, and the forecasted future.
 Such models are intended to be used as decision-making tools.
 Company executives might use them to:
 estimate the costs and
 project the profits of a proposed new project.

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Context and Objectives
 A model is a numerical or mathematical representation of a real-
life situation.
 A financial model is one which relates to business and finance
contexts.
 The typical objectives of financial modeling include to support
decisions relating:
 to business plans and forecasts,
 to the design, evaluation and selection of projects,
 to resource allocation and portfolio optimization,
 to value corporations, assets, contracts and financial instruments, and
 to other financing resolution.

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Context and Objectives ….
 In fact, there is no generally accepted (standardised) definition of
financial modeling.
 For some, it is a highly pragmatic set of activities, essentially
consisting of the building of Excel worksheets.
 For others, it is a mainly conceptual activity, whose focus is on the
use of mathematical equations to express the relationships b/n the
variables in a system, & for which the platform (e.g. Excel) is used
to solve such equations is not of relevance.

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Overview of excel functions for modeling
 Excel is used to store, analyze, and report on large amounts of data.
 It is often used by accounting teams for financial analysis, but can be used by
any professional to manage long and unwieldy datasets.
 Examples of Excel applications include balance sheets, budgets, or editorial
calendars
The main uses of Excel include:
 Data entry
 Data management
 Accounting
 Financial analysis
 Charting and graphing
 Programming
 Time management
 Task management
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Overview of excel functions for modeling
 Excel functions are generally designed to be robust when blank
cells are used as inputs to them, the transparency of models is
nevertheless often compromised by doing so.
• An important case where the deliberate use of blanks may be
valuable is as place-holders for not-yet-realised figures, for
example where forecast figures are used

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Overview of excel functions for modeling

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Overview of excel functions for modeling

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The Stages Of Modeling
 The modeling process can be considered as consisting of several stages
 The key characteristics of each stage include
 Specification: This involves describing the real-life situation, either
qualitatively or as a set of equations.
 In any case, at this stage one should also consider the overall objectives and
decision-making needs, and capture the core elements of the behaviour of the
real-world situation.
 One should also address issues relating to the desired scope of model validity,
the level of accuracy required and the trade-offs that are acceptable to avoid
excessive complexity whilst providing an adequate basis for decision support.
 itself (i.e. as captured within the formulae used in Excel).

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The Stages Of Modeling ……
 Implementation: This is the process to translate the specification into
numerical values, by conducting calculations based on assumed input values.
 For the purposes of this text, the calculations are assumed to be in Excel,
perhaps also using additional compatible functionality (such as Excel add-ins,
optimization algorithms, links to external databases and so on).
 Decision support: A model should appropriately support the decision.
However, as a simplification of the real-life situation, a model by itself is
almost never sufficient.
 A key challenge in building and using models to greatest effect is to ensure that
the process and outputs provide a value-added decision-support guide (not least
by providing insight, reducing biases or correcting invalid assumptions that
may be inherent in less-rigorous decision processes), whilst recognising the
limitations of the model and the modeling process.

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The Stages Of Modeling ……
• Note that in many practical cases, no explicit specification step is
conducted; rather, knowledge of a situation is used to build an
Excel workbook directly. Since Excel does not calculate
incorrectly, such a model can never truly be “(externally)
validated”: the model specification is the model

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