fm ebook - part 3-finaciall modelling

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Financial Modeling E-book

Part 3 of 4


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Completing the Income Statement

Forecast shares outstanding

Reference back to historical count

We will use the share count to calculate EPS and share repurchases

Calculate remaining line items (except for Interest Expense/ Income)

Calculate all relevant ratios for forecasting

Calculate CAGR for all line items

* Separate Schedule for Interest expense would be developed later in the module

Private and Confidential – Not for Circulation 2


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Income Statement - Sample

Forecast shares outstanding based on historical share count

Leave shares outstanding constant at this stage

Alter the forecast of shares after drawing up Shareholder’s Equity Schedule and shares outstanding


Assume constant at this stage


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Complete the margins and growth rates on the Income Statement

Leave interest expense, interest income and taxes blank at this stage

Calculate EBIT, pretax income and net income

Take care to get the past data and calculations right in order to proceed smoothly


Calculations


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Complete the margins and growth rates on the Income Statement


Calculations


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Calculate forecasted taxes – assume reasonable effective taxes


Calculations

Driver


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Calculate relevant growth rates for forecast period

Ensure the long term growth rates, CAGR, are reasonable


Calculate

relevant CAGRs


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Shareholder’s Equity Schedule

Equity Schedule Overview

Set up the line items and input past information

Forecast

• Share Repurchases

• Option proceeds & new shares issued for exercised options

• Dividends

• Future equity balances

Link up

• Ending balances to Balance Sheet

• Repurchase, options and dividends to Cash Flow Statement

* Separate Schedule for Interest expense would be developed later in the module



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Shareholder’s Equity - Sample

Set up the Shareholder’s equity schedule

Input past information – reconciliation of past data may be difficult, read through balance sheet to get cues

Make provision in the model for share repurchase, options and dividends


Referenced from BS

Past data may be

difficult to reconcile


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Input past information on share repurchases


Inputs


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Referenced from Income Statement

Calculations

Assumption/ Driver

Use reasonable estimates for EPS Multiple based on past trends or research


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Calculations

Driver

Calculate the amount spent on share repurchase plans

Consider past information on share repurchase plans

Look out for research and management announcements on the same


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Input appropriate past information on options exercised

Inputs


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Assume reasonable levels of option conversions in the forecast period

Average strike price is commonly used to determine option proceeds

Another approach is to assume total proceeds


Calculations

Inputs


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Input all past information on dividends – dividend per share would be an important measure, make sure to calculate the same


Calculations

Inputs Referenced from Income Statement


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Forecast estimated dividends using

Pay out ratio

Fixed dividend outgo

Per share payout


Driver

Calculations

Referenced from Income Statement


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Forecast equity account in its entirety


Referenced

Assumption


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Link up with Balance Sheet

Referenced from

Shareholders Equity Schedule


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Link the projected change in equity schedule items to Cash Flow Statement


References


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Illustrative Flow of Funds


Working Capital, Depreciation, Amortization, Other LT Items and Equity Schedules

Income

Statement

Cash Flow

Statement

Balance

Sheet

Working

Capital

Sales

COGS

Change in WC

Working Capital

PP & E,

Depreciation

Depreciation

Intangibles,

Amortization

Am

ort

ization

Intangibles

Am

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ization

Other Long

Term Items

Shareholder’s

Equity


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Shares Outstanding Schedule

Enter past share information

Basic Shares – actual and average

Capture past effects of options and convertibles as appropriate

Diluted Shares - average

Reference Shares repurchased and new shares from exercised options

Calculate forecasted basic shares (actual)

Calculate average basic and diluted shares

Reference projected shares to Income Statement (recall Income Statement Build up!)



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Shares Outstanding Schedule - Sample

Input historical shares outstanding information


Note: This schedule is commonly integrated with the Equity Schedule

Inputs

Calculations


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Calculate forecasted basic shares

Reference shares repurchased and new shares issued for options exercised


Calculations

Referenced


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Calculate forecasted diluted shares

Calculate average basic shares

Make reasonable assumptions of options exercised effects

Calculate average diluted shares


Assumption


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Link up forecasted diluted weighted average shares outstanding to Income Statement


Referenced to Shares

Outstanding Schedule


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Debt and Interest

Income Statement – interest expense/ income are incomplete at this stage

Balance Sheet – cash and debt items are incomplete at this stage

Cash Flow Statement –

Calculate cash flow from operating and investing activities

Calculate cash flow from available financing activities

Calculate ending cash balance

Link up with Balance Sheet



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The Cash Flow Statement

Cash Flow from Operating Activities

Net Income

Add: Non Cash Charges/ Incomes

Add: Change in Working Capital

Add: Change in LT assets/ liabilities


Cash Flow from Investing Activities

Capital Expenditures

Add: Proceeds from Asset Sales

Add: Additions to Intangibles

Add: Business Acquisitions

Cash Flow from Financing Activities

Available Cash Flow is used for:

Repayment of Debt, payment of dividend, repurchase of equity, maintain higher cash balances

Cash flow deficit is funded by”

Revolving debt, issuance of LT debt, issuance of equity, cash balances

+

Free Cash Flow Available for

Financing Activities


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Change in Cash – Schematic Diagram



Add: Effects of Ex. Rates on Cash

Add: Previous year’s Cash Balance

= Ending Cash Balance

+

Net Cash Flow



+


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Cash Flow Statement - Sample


Link up Net Income to the Cash Flow Statement

Calculate Cash Flow from Operating and Investing activities

Calculate Cash Flow Available for Financing Activities

Referenced from

Income Statement

Calculations


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Calculate Cash Flow Available for Financing Activities and Net Change in Cash

Calculations


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Reference “beginning cash balance” from the Balance Sheet


Reference from BS


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Forecasted Cash is yet to be linked – this will be done later in the model


Excel reads

blank cells as Zero


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Calculate Ending Cash Balance


Calculations


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Link up “ending cash balance” to the Balance Sheet


Referenced

from Cash Flow


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Illustrative Flow of Funds


Linking up the Core Statements

Income

Statement

Cash Flow

Statement

Balance

Sheet

Working

Capital

Sales

COGS

Change in WC

Working Capital

PP & E,

Depreciation

Depreciation

Intangibles,

Amortization

Am

ort

ization

Intangibles

Am

ort

ization

Other Long

Term Items

Shareholder’s

Equity


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fm ebook - part 3-finaciall modelling

Documents

income statement private

expense income

pretax income

net income

forecast of shares

shareholders equity

module private

separate schedule