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FarhanAnsari - 03525588819 (FINANCIAL MODELLING-210) Lab Manual
FarhanAnsari - 03525588819 (FINANCIAL MODELLING-210) Lab Manual
REQUIREMENT OF
BACHELOR OF COMMERCE (HONOURS)
B. Com (H)-210
Course: B.COM(H)
Farhan Ansari
B COM. (H)
Enrollment no – 03525588819
TABLE OF CONTENT
Page
S.No. Topics No.
1 Financial Modelling 1
Introduction
Importance
Components
2 MS Excel 2
Features
Screenshot of excel describing the tabs
3 Cell Reference 3
4 Data Formats 4-5
5 Conditional Formatting-Introduction 6-10
Types of Conditional Formatting
How to apply Conditional Formatting
Screen Shots after application
6 Macros 11-15
Introduction
How to enable it
How to run it
Screens shots for every step
7 Template 16-20
Introduction
Features
Application with Example
8 What if Analysis 21-23
Scenario Manager
Goal Seek
Data Table
9 Pivot Table 24-25
Introduction
Create a pivot table
Steps to create pivot table
Screen Shots after application
10 Lookup Function 26-31
Introduction
Application with Example
VLOOKUP-Purpose, Syntax and application (Screenshots)
Steps of VLOOKUP
HLOOKUP-Purpose, Syntax and application (Screenshots)
Steps of HLOOKUP
11 Index & Matching 30-32
Purpose, Syntax and application (Screenshots)
Various Text Functions
12 (Left, Right, find, Proper, Trim, Rept, Upper, Lower, Concatenate)
Purpose, Syntax and application (Screenshots) 33-35
13 Count Function: Introduction, Purpose, Syntax and application (Screenshots)
Count 36-37
Count A
Count Blank
Count if and Count ifs
14 Statistical Functions: Purpose, Syntax and application (Screenshots) 38-41
Logical Functions (IF, OR, AND): Purpose, Syntax and 42-43
15 application (Screenshots)
16 Historical Data 44-47
17 Trend & Forecast 48-56
Purpose, Syntax and application (Screenshots)
18 Time Value of Money 57-61
What is TVM
Significance of TVM
Various Terminologies Used
Application with Example
19 Capital Budgeting 62-75
Introduction
Significance
Theories of Capital Budgeting
Application of each individually
Examples with screenshots
20 Cost of Capital 76-80
Introduction
Significance
Types of Cost & their application
Examples with screenshots
WACC
21 Forecasting Methods 81-82
Moving Average: Introduction, Significance & Application with example
Exponential: Introduction, Significance & Application with example
22 Ratio Analysis 83-86
Introduction
Significance
Various Ratios calculated with examples
23 Earnings per share 87
Introduction
Calculation with example
24 Valuation Method 88-89
Discounted cash flow modelling
Comparable trading multiples
Precedent Transact
25 Market Based Methods 90-96
EV
EBIT
EBITDA
EV/EBITDA
EV/Sales
26 Sensitivity Analysis 97
Introduction
Application with Example
27 Probability Analysis 98
Introduction
Application with Example
1. FINANCIAL MODELING
INTRODUCTION
IMPORTANCE
Financial Modelling is the main core element to take the major business decisions in a
corporate world. Financial models are the most valuable tools for executing business choices to
get perfect solutions. A model can advise you regarding the grade of risk associated with
implementing certain decisions. They can also be utilized to devise an effective financial
statement that reflects the finances and operations of company. These models help online
internet businesses take quick decisions more confidently.
COMPONENTS
1
2. MS EXCEL
FEATURES
• Add Header and Footer. MS Excel allows us to keep the header and footer in our spreadsheet
document.
• Find and Replace Command. ...
• Password Protection. ...
• Data Filtering. ...
• Data Sorting. ...
• Built-in formulae. ...
• Create different charts (Pivot Table Report) ...
• Automatically edits the result
2
3. CELL REFERNCE
A cell reference refers to a cell or a range of cells on a worksheet and can be used in a formula
so that Microsoft Office Excel can find the values or data that you want that formula to
calculate. In one or several formulas, you can use a cell reference to refer to: ... Data on other
worksheets in the same workbook.
3
4. DATA FORMATS
Data appears in different sizes and shapes, it can be numerical data, text, multimedia, research
data, or a few other types of data. The data format is said to be a kind of format which is used
for coding the data. The data is coded in different ways. It is being coded, so that it can be read,
recognized, and used by the different applications and programs.
In the information technology, the data format may be referred in different ways. It can be
termed as the data type, which is a constraint in the type system which was positioned after the
interpretation of the data. It is also termed as a file format which is being used for storing the
encoding data in a computer file. Or it can also be termed as Content Format, where the media
data is represented in the particular format, that is a video format and audio format.
When it comes to choosing a data format, there are several things which one need to check like
the characteristics of the data or the size of the data, infrastructure of the projects, and the use
case scenarios. Certain tests are performed in order to choose the right data format by checking
the speed of writing and reading the data file. Mainly there are three main types of data formats
which are also called as GIS Data formats. All of these data formats are handled in a different
way. They are being used for different purposes. The three data formats are:
File-Based Data Format – This type of data format includes either one file or more than one
file. These files are then stored in any of the arbitrary folders. In most of the cases, it uses the
single file only for example DGN. But then there are cases, which even includes at least three
files. The filename extension of all these three files is different from each other. That is SHX,
SHP, and DBF. All three files are important and are required here. As different tasks are
performed by all these three files internally. One uses the filename as the name of the data
source. There are many layers present in it, and it is not possible to know about them just with
the help of the filename. Like in shapefile, there is only one data source for every shapefile.
And there is only one layer, which is named similarly as the name of the file. Some of the
examples of file-based data format are MicroStation Design Files, Shapefiles, and GeoTIFF
images.
Directory-Based Data Format – In this type of data format, whether there is one file or there
is more than one file, they are all stored in the parent folder in a particular manner. There are
some cases where the requirement of an additional folder is there in the file tree in some other
location so that it can be accessed easily. It is a possibility that data source is the directory
itself. There are many files present in the directory, which are represented at the available data’s
layers. For example, the Polygon Data is represented by the PAL.ADF. As there is more than
one file in the folder with the ADF file extension which is included in the ESRI ArcInfo
Coverages. The ADF file extension includes the line string data or the arc string data. All the
ADF files serve as a layer which is present in the data source inside the folder. Some of the
4
examples of Directory-Based Data Format are US Census TIGER and ESRI ArcInfo
Coverages.
Database Connections – In one respect, the database connections are quite similar to the
above-mentioned data formats that are file and directory-based data format. For interpreting, for
Map Server, they give geographic coordinate data. One need to access the coordinates inside
the Map Server, that are creating the vector datasets. The stream of coordinates that are
provided by the database connections is stored temporarily in the memory. The MapServer then
reads these coordinates for making the map. Coordinate Data is the most important part and
most of the focus is on it only. However, one may also require tabular data and attributes. The
database connection generally consists of the following information like Host that is the
server’s direction, Database Name, the Username and Passwords, Geographic Column name,
and the table name or the view name. A few examples of Database Connections are MySQL,
ESRI, PostGIS, and ArcSDE.
5
5. CONDITIONAL FORMATTING
Conditional formatting is a feature in many spread sheet applications that allows you to
apply specific formatting to cells that meet certain criteria. It is most often used as colour-
based formatting to highlight, emphasize, or differentiate among data and information
stored in a spread sheet.
Conditional formatting enables spread sheet users to do a number of things. First and
foremost, it calls attention to important data points such as deadlines, at-risk tasks, or
budget items. It can also make large data sets more digestible by breaking up the wall of
numbers with a visual organizational component. Finally, conditional formatting can
transform your spread sheet (that previously only stored data) into a dependable “alert”
system that highlights key information and keeps you on top of your workload.
Use conditional formatting to help you visually explore and analyse data, detect critical issues,
and identify patterns and trends. Conditional formatting makes it easy to highlight interesting
cells or ranges of cells, emphasize unusual values, and visualize data by using data bars, color
scales, and icon sets that correspond to specific variations in the data.
A conditional format changes the appearance of cells on the basis of conditions that you
specify. If the conditions are true, the cell range is formatted: if the conditions are false, the cell
range is not formatted. There are many built-in conditions, and you can also create your own
(including by using a formula that evaluates to True or False).
For Example:
6
7
HOW TO APPLY CNDITIONAL FORMATTING
INTERPRETATION
Quickly Identify Duplicates
Go to Home –> Conditional Formatting –> Highlighting Cell Rules –> Duplicate
Values.
8
3. In the Duplicate Values dialogue box, make sure Duplicate is selected in the left drop
down. You can specify the format to be applied by using the right drop down. There are
some existing formats that you can use, or specify your own format using the Custom
Format option.
4. Click ok
9
You can apply conditional formatting to a range of cells (either a selection or a named
range), an Excel table, and in Excel for Windows, even a PivotTable report. This is why
conditional formatting is a really helpful tool.
CONCLUSION
Conditional formatting enables you to apply special formatting to cells in your
spreadsheet that meet certain criteria.
Use conditional formatting to help you visually explore and analyse data, detect critical
issues, and identify patterns and trends. Conditional formatting makes it easy to
highlight interesting cells or ranges of cells, emphasize unusual values, and visualize
data by using data bars, color scales, and icon sets that correspond to specific variations
in the data.
10
6. MACROS
INTRODUCTION
Macro is a record and playback tool that simply records your Excel steps and the macro will
play it back as many times as you want. Macros save time as they automate repetitive tasks.
PURPOSE OF MACRO
A macro is used to automate a task that you perform repeatedly or on a regular basis. It is a
series of commands and actions that can be stored and run whenever you need to perform the
task. You can record or build a macro and then run it to automatically repeat that series of steps
or actions.
INTERPRETATION
11
STEP 2:Now another window will open, in that window do following things
12
STEP 3: Developer Tab
13
• Add the sum and use the SUM function to get the total amount for all months.
Now that we have finished our routine work, we can click on stop recording macro
button
14
STEP 7: Replay the Macro
You will get the following data for all the remaining students
CONCLUSION
Macro is an action or a set of actions that you can record, give a name, save and run as many
times as you want and whenever you want. When you create a macro, you are recording
through your mouse clicks and keystrokes. When you run a saved macro,
Macros help you to save time on repetitive tasks involved in data manipulation and data reports
that are required to be done frequently.
15
7. TEMPLATE
INTRODUCTION
Templates allow you to create blank sheets and blank workbooks that have customized formats
as well as customized Page Setup settings, including headers and footers.
A template is a special Excel file type that when opened through Excel, creates a normal sheet or
a normal file based on the template file settings. If you open a template file directly from a folder
it will open as a template file and allow you to edit it and save it.
Instead of starting with a blank sheet, you can quickly create a new workbook based on an Excel
template. The right template can really simplify your life since it makes the most of tricky
formulas, sophisticated styles and other features of Microsoft Excel
FEATURES
16
APPLICATION WITH EXAPMLE
There are many templates available in the M.S Excel, from the NEW section select any template
according to your need.
Step 1: Here we are creating monthly budget of a company so we will select monthly budget
17
Step 3: Enter the data in the template and the total budget will be automatically calculated and
the bar graph will change accordingly.
18
INTERPRETATION
Here we prepared Monthly Budget of a Company using template in M.S Excel. The format of
the template includes 4 sheets i.e. Income in which all the incomes of the company are recorded.
Then Personnel Expenses where expenses are recorded, then there is Operating Expenses where
other expenses are recorded and finally Monthly Budget Summary, in this it summarizes the total
of income, expenses, and operating expenses to calculate the final monthly budget. There is a
graphical representation of the budget as well which shows the difference between the estimated
and actual budget to make it easy to understand for the users.
19
CONCLUSION
Templates basically enforce overall consistency by having a pre-determined structure and layout.
All documents made using a template will match its layout exactly. When it comes to your
document’s content, Word’s Styles tool is a great way to maintain consistent formatting.
Templates can be utilized and customized for various purposes. Using templates helps to decrease
costs and saves time. As users learn the power of our tools capabilities, they either modify
provided templates or create their own custom templates. These have countless benefits for users
who elect to use them.
20
8. WHAT IF ANALYSIS
What-If analysis is one of the most common processes that data analysts, managers, or excel
users tend to use these days for advanced business analysis.
What-If Analysis in Excel allows you to try out different values (scenarios) for formulas. The
following example helps you master what-if analysis quickly and easily.
If we were to define this analysis, then we would say that it is a basic process of calculating by
going back, so that we can find out the input and that too by providing a particular and specific
output in between.
Means you will give Excel the output that you want and ask Excel to give you the input which
can provide you that desired output.
A person will easily be able to estimate the particular savings that they should in a month so that
they can properly plan their retirement goals.
Also, they will be able to find their return on investment and then plan the budget accordingly.
So, there is no doubt that it is one of the most important processes that people should be using
right now.
When it comes to the performing of the what-if analysis, most people tend to use the Excel in
their computer to do that in the best way. You will be able to use three different tools to perform
this analysis in the Excel sheet.
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1. SCENARIOS
With the help of the scenarios tool in the excel format, the user will be able to perform the what-
if analysis in the best way. The first thing that they need to do is to create some certain scenarios
which are pretty random, and then we will move on from there.
If you are not able to find out the Scenario Manager tool, then it is located right near the Data
ribbon, and you will find it under the What-if analysis section.
2. DATA TABLES
You will be able to find a data table with the scenario summaries, where there will be many
different scenarios with their cells and values. So, this is where you need to use the Data tables
because these can easily be based on the different variables in the first place. If there is just one
variable, then you need to use a 2-column data table.
The first column will have the variable, and the second will be left all blank so that Excel can
populate it in the best way. All you have to do is select the table and then navigate it to the What-
if analysis section and then choose the option of Data table, and you are definitely all set.
3. GOAL SEEK
You will also find this Goal Seek tool in the same section where you found the Scenario Manager.
All you have to do is provide three different types of parameters into the cells. You might come
across some set cells, and it means the cells that would contain the goal value.
22
This is also considered to be one of the most important tools to use. All you have to do is put
these parameters and then look for the solutions, and you are all set.
Conclusion
We can say this without a doubt that it is one of the most important processes that one needs to
use for various scenarios. What-if the analysis is one of the most useful methods of checking
different scenarios preferred mid to senior-level managers and data analysts. You can use the
Scenario Manager for comparing different business scenarios with different changing inputs. It
is suggested to use Goal Seek for the Reverse Calculations. You can use the Data Table when 1
or 2 inputs are changing for changing the output.
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9. PIVOT TABLE
INTRODUCTION
A Pivot Table is an option in Excel used to summarize, sort, reorganize, group, count, total or
average data stored in a table.
It allows us to transform columns into rows and rows into columns. It allows grouping by any
field (column), and using advanced calculations on them.
It can be easily applied to any selected data by selecting pivot table on insert tab.
Here we have a random data of fruits and vegetables, their respective amounts, dates and origin.
Let’s apply pivot table and see the working of it.
To apply pivot table first we select the required data < go on insert tab <select pivot table from
tables options at the left. A pop-up menu will open.
24
In this pop-up we will fill all the necessary details like range of pivot table, place where it
would be placed etc and then select OK. Pivot table will be formed on a new or existing
worksheet as selected.
Now using the Fields present on the right side of the screen we can make an organized table
according to our needs. We just have to drag and drop respective fields in the rows/column/
values/filter boxes given below.
This is how easily pivot table can be created and modified. It is a great tool for organizing,
summarizing and analyzing any kind of data in form of a table.
CONCLUSION
Pivot table helps to summaries the data and shows it in a tabular which can be useful for
logistics and different summarization of data it also makes easy to calculate selected data to
help arrange and make future decision about inventory, sale etc.
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10.LOOKUP FUNCTIONS
INTRODUCTION
The LOOKUP function is one of the lookup and reference functions. It is used to return a
value from a selected range (row or column containing the data in ascending order). ...
The function searches for the lookup-value in the lookup-vector and returns the value from the
same position in the lookup-result.
FEATURES
• Lookup_value Required. A value that LOOKUP searches for in the first vector. ...
• lookup _vector Required. A range that contains only one row or one column. ...
• result _vector Optional. A range that contains only one row or column.
In the above figure I have taken some vegetables and fruits and divided into as on order id,
product, category, date and from where it is imported.
I have applied Lookup formula to known details for a product in an easier way as I have not
look back in the previous table.
INTERPRETATION:
CONCLUSION:
In this experiment, we have learned LOOKUP functions in MS Excel 2007. They can be used
to automatically perform many operations and tasks that are otherwise time-consuming and
prone to mistakes, such as working with arrays of data. Now you can explore by using these
Excel features in your daily work.
VLOOKUP FUNCTION
VLOOKUP stands for 'Vertical Lookup'. It is a function that makes Excel search for a certain
value in a column (the so called 'table array'), in order to return a value from a different column
in the same row.
27
FEATURES:
It is a function that makes Excel search for a certain value in a column (the so called
'table array'), in order to return a value from a different column in the same row.
In the above figure I have taken some vegetables and fruits and divided into as on order id,
product, category, date and from where it is imported.
I have applied Vlookup formula to known details for a product in an easier way as I have not
look back in the previous table.
INTERPRETATION:
28
CONCLUSION:
In this experiment, we have learned VLOOKUP functions in MS Excel 2007. They can be used
to automatically perform many operations and tasks that are otherwise time-consuming and
prone to mistakes, such as working with arrays of data. Now you can explore by using these
Excel features in your daily work.
HLOOKUP FUNCTION
WHAT IS HLOOKUP?
HLOOKUP stands for Horizontal Lookup and can be used to retrieve information from a table
by searching a row for the matching data and outputting from the corresponding column. While
VLOOKUP searches for the value in a column, HLOOKUP searches for the value in a row.
INTERPRETATION:
29
Step 2: we have to find the marks of D, so our ‘lookup_value’ will be a “D”.
Step 4: In this ‘row_index_num’ case, would be 4 as here we have to fetch a value from the fourth
row of the table.
Step 5: ‘range_lookup’ will be FALSE as here we only want to fetch the exact match value.
30
Step 6: the result of this formula is 83
CONCLUSION:
In this experiment, we have learned HLOOKUP Function in MS Excel 2007. They can be used
to retrieve information from a table by searching a row for the matching data and outputting from
the corresponding column.
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11. INDEX AND MATCHING
INDEX MATCH is a clever way to perform a two-way lookup in Excel by combining the
power of the INDEX and MATCH functions. It is used as a workaround for the limitations of
VLOOKUP, and offers great flexibility once you understand how it works.
INDEX:-
Syntax: - =INDEX (array,row_num,[column_num])
Formula: - = INDEX (A2:D6,G2,H2)
MATCH:-
Syntax: - =MATCH (lookup_value, lookup_array,[match_type])
Formula: - = MATCH (D16, B14:B18, 0)
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12.VARIOUS TEXT FUNCTIONS (LEFT, RIGHT ,FIND ,PROPER
,TRIM ,REPT ,UPPER ,LOWER,,CONCATENATE)
The Microsoft Excel LEFT function is a function that allows you to extract a substring from a
string and starts from the leftmost character. This is a built-in function in excel, which has been
categorized as a String/Text Function.
SYNTAX:- LEFT(text,[num_chars])
FORMULA:- LEFT(L2,2)
The RIGHT function is a text string function that gives the number of characters from
the right side of the string. It helps extract characters beginning from the rightmost side to
the left. The result depends on the number of characters specified in the formula.
SYNTAX:- RIGHT(text,[num_chars])
FORMULA:- RIGHT(L2,2)
The Excel FIND function returns the position (as a number) of one text string inside another.
When the text is not found, FIND returns a #VALUE error. A number representing the location
of find_text.
33
SYNTAX:- FIND(find_text ,within_text ,[start_num])
FORMULA:- FIND(“O”,L2,1)
PROPER function is categorized as String or Text function in excel. The PROPER function
converts the first character to upper case and rests to lower case. Basically,
the PROPER function in excel is used to convert your input text to proper case. It can be used
to capitalize each word in a given string.
SYNTAX:- PROPER(text)
FORMULA:- PROPER(L2)
The TRIM function is categorized under Excel Text functions. ... TRIM helps remove the
extra spaces in data and thus clean up the cells in the worksheet. In financial analysis,
the TRIM function can be useful in removing irregular spacing from data imported from other
applications.
SYNTAX:- TRIM(text)
FORMULA:- TRIM(L2)
Use the REPT function to repeat text a given number of times. This can be useful if you want
to fill a cell, or pad values to a certain length. It's possible to build a basic histogram chart
using REPT, by translating values directly into a certain number of (repeated) characters.
FORMULA:- REPT(L2,2)
34
PURPOSE UPPER FORMULA
The UPPER function is an Excel Text function. ... Thus, the function converts all characters
in a supplied text string into upper case. In financial analysis, we often import data from
external sources. The UPPER function will help us convert text to upper case if required.
SYNTAX:- UPPER(text)
FORMULA:- UPPER(L5)
The Excel LOWER function returns a lower-case version of a given text string. Numbers and
punctuation are not affected. ... text - The text that should be converted to lower case.
SYNTAX:- LOWER(text)
FORMULA:- LOWER(L5)
Use CONCATENATE, one of the text functions, to join two or more text strings into one
string. Important: In Excel 2016, Excel Mobile, and Excel for the web, this function has been
replaced with the CONCAT function.
SYNTAX:- CONCATENATE(text1,[text2],[text3])
FORMULA:- CONCATENATE(L5,L4,L7)
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13. COUNT FUNCTION: INTRODUCTION, PURPOSE, SYNTAX
AND APPLICATION
The COUNT function counts the number of cells that contain numbers, and counts numbers
within the list of arguments. Use the COUNT function to get the number of entries in a
number field that is in a range or array of numbers.
SYNTAX:- COOUNT(value1:value4)
FORMULA:- COUNT(C2:F2)
The COUNTA function counts cells containing any type of information, including error values
and empty text (""). For example, if the range contains a formula that returns an empty string,
the COUNTA function counts that value. The COUNTA function does not count empty cells.
SYNTAX:- COOUNTA(value1:value4)
FORMULA:- COUNTA(C2:F2)
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PURPOSE COUNTBLANK FORMULA
Use the COUNTBLANK function, one of the Statistical functions, to count the number of
empty cells in a range of cells.
SYNTAX:- COOUNTBLANK(value1:value4)
FORMULA:- COUNTBLANK(C3:F3)
COUNTIF extends the capabilities of the basic COUNT function by allowing you to
tell Excel to only COUNT items that meet a certain criteria. New in Excel 2007 is
the COUNTIFS function, which allows you to stipulate multiple criteria, hence the plural.
SYNTAX:- COOUNTIF(value1:value4,”value”)
FORMULA:- COUNTIF(C2:F7,”70”)
SYNTAX:- COOUNTIF(criteria_range,”value”)
FORMULA:- COUNTIF(C2:F7,”90”)
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14. STATISTICAL FUNCTIONS: PURPOSE, SYNTAX AND
APPLICATION
INTRODUCTION
Statistical functions are used when a mathematical process is required for a range of cells,
such as summing the values in several cell locations. For these computations, functions are
preferable to formulas because adding many cell locations one at a time to a formula can be
very time-consuming.
SUM:-
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AVERAGE:-
MULTIPLICATION:-
SYNTAX: - =value1*value2*value3…….
FORMULA: - = C2*D2*E2*F2
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SUBSTRACTION:-
SYNTAX: - = (value1- value2)
FORMULA: - = (G3-G2)
DIVISION:-
SYNTAX: - =value1/4
FORMULA: - =G2/4
PERCENTAGE:-
SYNTAX: - = (value1*100)/400
FORMULA: - = (G2*100)/400
40
MINIMUM:-
SYNTAX:-=MIN (value1, value2, value3…….)
FORMULA: - =MIN (C2, D2, E2, F2)
MAXIMUM:-
SYNTAX: - MAX (value1, value2, value3……)
FORMULA: - MAX (C2, D2, E2, F2)
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15. LOGICAL FUNCTIONS (IF,OR, AND): PURPOSE,SYNTAX
AND APPLICATION
PURPOSE IF FORMULA
The IF function is one of the most popular functions in Excel, and it allows you to make
logical comparisons between a value and what you expect. So an IF statement can have two
results. The first result is if your comparison is True, the second if your comparison is False.
SYNTAX:- IF(logical_test,[value_if_true],[value_if_false])
FORMULA:- IF(E2>20000,”PROFIT”,”LOSS”)
PURPOSE OR FORMULA
The OR function is a logical function to test multiple conditions at the same time. OR returns
either TRUE or FALSE. For example, to test A1 for either "x" or
"y", use =OR(A1="x",A1="y").
42
SYNTAX:- =OR(logical1,[logical2],[logical3])
FORMULA:- =IF(OR(E2>=20000,E2>=15000,E2>=10000),"PROFIT","LOSS")
The AND function is used to check more than one logical condition at the same time, up to 255
conditions, supplied as arguments. Each argument (logical1, logical2, etc.) must be an
expression that returns TRUE or FALSE, or a value that can be evaluated as TRUE or FALSE.
SYNTAX:- =AND(logical1,[logical2],[logical3])
FORMULA:- =IF(AND(E2>=20000,E2>=15000,E2>=10000),"PROFIT","LOSS")
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16. HISTORICAL DATA
Historical data, in a broad context, is collected data about past events and circumstances
pertaining to a particular subject. By definition, historical data includes most data generated
either manually or automatically within an enterprise.
USE
It is used to find the historical data of any company and analyse it according to the current
scenario. This helps knowing the company better by the shareholders of the particular
organization.
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• SELECT YEAR
• SELECT EXPIRY
45
• NOW YOU CAN EASILY ANAYLSE OR AUDIT THE HISTORICAL DATA OF
THE GIVEN STOCK.
46
CONCLUSION
Historical data enables the tracking of improvement over time which gives key insights. These
insights are essential for driving a business. Marketers are always on the run to better
understand and segment the customers. Keeping historical data can help marketers understand
if their customer segment is changing.
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17. TREND AND FORECAST
TREND ANALYSIS
The Excel TREND function is used to calculate a linear trend line through a given set of
dependent y-values and, optionally, a set of independent x-values and return values along the
trend line.
Additionally, the TREND function can extend the trendline into the future to project dependent
y-values for a set of new x-values.
PURPOSE
For this, we extend our time series with a few more month numbers and do trend projection by
using this formula:
=TREND(B2:B16,A2:A16,A17:A19)
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STEP 2:- Go to the insert and insert the line chart
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STEP 3:- Now Right click on the line chart and add trend line
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STEP 5:- Now we predict the sales in monthsAPR,MAY,JUN
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FORECASTING
INTODUCTION
In Microsoft Excel, there are several functions that can help you create linear and exponential
smoothing forecasts based on historical data such as sales, budgets, cash flows, stock prices, and
the like.
The FORECAST function in Excel is used to predict a future value by using linear regression.
In other words, FORECAST projects a future value along a line of best fit based on historical
data.
Where:
X (required) - a numerical x-value for which you want to predict a new y-value.
Known_y's (required) - an array of known dependent y-values.
Known_x's (required) - an array of known independent x-values.
FEATURES
PURPOSE
The forecasting function is mainly used in FMCG, financial, accounting and risk management
where we can predict the future sales figure; assume that FMCG company has huge sales in order
to find out the next month or next year sales this FORECAST function is very useful to predict
the exact result which will be useful for the management in analyzing revenue and other
promotion reports.
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EXAMPLE OF FORECAST FUNCTION IN EXCEL
Lets take an example of Maruti pvt ltd. We will take data from 1st March 2021 to 12th April
2021.
INTERPRETATION
STEP 1. Firstly we need to apply the forecast function we can use 3 ways:
A. Formula menu >insert function. A dialogue box will be displayed. Choose the category
statistically. Once you choose the statistical, you will find a list of a function. Choose forecast
function.
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B. In the advanced version, we can use the shortcut wherein the formula menu we can see the
more function.
⚫ Choose the data cell where you want to write the formula
Where x is the field or date of which you want the forecast data
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Step 3. Input the date for which you want the forecast data.
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CONCLUSION
The FORECAST function predicts a value based on existing values along a linear trend. In
financial modeling, the FORECAST function can be useful in calculating the statistical value of
a forecast made. For example, if we know the past earnings and expenses, we can forecast the
future amounts using the function.
FORECAST calculates future value predictions using linear regression, and can be used to predict
numeric values like sales, inventory, test scores, expenses, measurements, etc.
SOLVER
INTRODUCTION
Solver is a Microsoft Excel add-in program you can use for what-if analysis. Use Solver to find
an optimal (maximum or minimum) value for a formula in one cell — called the objective cell
— subject to constraints, or limits, on the values of other formula cells on a worksheet. Solver
works with a group of cells, called decision variables or simply variable cells that are used in
computing the formulas in the objective and constraint cells. Solver adjusts the values in the
decision variable cells to satisfy the limits on constraint cells and produce the result you want
for the objective cell.
Put simply, you can use Solver to determine the maximum or minimum value of one cell by
changing other cells. For example, you can change the amount of your projected advertising
budget and see the effect on your projected profit amount.
STEPS TO SOLVER
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18.TIME VALUE OF MONEY
What Is Time Value of Money (TVM)?
The Time Value of Money (TVM) is the concept that money you have now is worth more
than the identical sum in the future due to its potential earning capacity. This core principle of
finance holds that provided money can earn interest, any amount of money is worth more the
sooner it is received.
Future Value is the sum of money that any saving scheme with a compounded interest will
build to by a pre-decided future date. It applies to both lumpsum as well as recurring
investments like SIP. Below given is the formula executed to obtain Future Value (FV)
FV = PV * (1+i) ^N
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Interpretation
Let’s calculate Present Value (PV) and see the working of it
Step 1
Step 2
Now, we have determined the Present (PV) in this case i.e., 25489.71
We obtained the
Present Value (PV) to be 25489.71
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Step 3
So, with the given data (Future Value (FV), Time and Rate )and formula we were able to find
the Present Value (PV) by putting the given data in the Formula
Here we have data in which the Present Value (PV), Rate and Time are given like shown
below and we have to find out the Future Value (FV).
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INTERPRETATION
Let’s calculate Future Value (FV) and see the working of it
Step 1
Step 2
Now, we have determined the Future Value (FV) in this case i.e., 631835.1
We obtained the
Future Value (FV) to be 631825.1
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Step 3
So, with the given data (Present Value (PV), Time and Interest Rate) and formula we were
able to find the Future Value (FV) by putting the given data in the Formula.
CONCLUSION
The Time Value of Money (TVM) is the concept that money you have now is worth more than
the identical sum in the future due to its potential earning capacity. This core principle of
finance holds that provided money can earn interest, any amount of money is worth more the
sooner it is received.
At the most basic level, the Time Value of Money (TVM) demonstrates that, all things being
equal, it is better to have money now rather than later. The more time there is, the larger its
effect on the value of wealth. Financial plans are expected to happen in the future, so financial
decisions are based on values some distance away in time.
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19. CAPITAL BUDGETING
INTRODUCTION
Capital budgeting is the process a business undertakes to evaluate potential major projects or
investments. Construction of a new plant or a big investment in an outside venture are examples
of projects that would require capital budgeting before they are approved or rejected.
SIGNIFINACE
There are several capital budgeting analysis methods that can be used to determine the
economic feasibility of a capital investment. They include the
1.Payback Period
1.Payback Period
The Payback Period shows how long it takes for a business to recoup an investment. This type of
analysis allows firms to compare alternative investment opportunities and decide on a project
that returns its investment in the shortest time, if those criteria are important to them.
For example, a firm may decide to invest in an asset with an initial cost of $1 million. Over the
next five years, the firm then receives positive cash flows that diminish over time. What is the
payback period? As seen from the graph below, the initial investment is fully offset by positive
cash flows somewhere between periods 2 and 3.
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PURPOSE OF PAYBACK PERIOD
Payback period as a tool of analysis is often used because it is easy to apply and easy to
understand for most individuals, regardless of academic training or field of endeavor. When used
carefully or to compare similar investments, it can be quite useful. As a stand-alone tool to
compare an investment to "doing nothing," payback period has no explicit criteria for decision-
making.
Question: Mr. Hiralal owns a rental car company. He is evaluating whether to start a new route.
Project should have a payback of 5 years.
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EXAMPLES WITH SCREENSHOTS
Step 1:
Enter the initial investment in the Year 0 column and for each year in the year’s column.
Step 2:
Calculate the balance of each year by adding the balance of previous year and cash flow of
current year.
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Step 3:
Calculate the payback period (Formula=Year before the payback period occurs + (balance in
year before recovery / Net cash flow in year after recovery)
Discounted payback period refers to the time period required to recover its initial cash outlay and
it is calculated by discounting the cash flows that are to be generated in future and then totaling
the present value of future cash flows where discounting is done by the weighted average cost of
capital or internal rate of return.
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Payback Period vs. Discounted Payback Period
The payback period is the amount of time for a project to break even in cash collections using
nominal dollars. Alternatively, the discounted payback period reflects the amount of time
necessary to break even in a project, based not only on what cash flows occur but when they
occur and the prevailing rate of return in the market.
Step 1: Enter the initial investment in the Year 0 column and for each year in the year’s column.
Step 2:
Find out the present value/ discounted cash flow from the net cash flow of each year using the
formula of PV (rate, nper, pmt [fv], [type])
Fv- An investment’s future value at the end of all payment periods (nper)
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Step 3:
Calculate the cumulative discounted cash flow or the balance of each year by adding the balance
of previous year and discounted cash flow of current year.
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Step 4:
Calculate the Discounted Payback Period. (Formula Year Before the Discounted Payback Period
Occurs + Balance in Year Before Recovery / Discounted Cash Flow in Year After Recovery)
Conclusion
Payback period is an essential assessment during calculation of return from a particular project
and it is advisable not to use the tool as the only option for decision making. During similar kind
of investments, however, a paired comparison is useful.bat in case of detailed analysis like net
present value or internal rate of return the payback period can act as a tool with supporting of
above those particular formulas
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3.Net Present Value.
Net present value (NPV) is the difference between the present value of cash inflows and the
present value of cash outflows over a period of time. NPV is used in capital budgeting and
investment planning to analyse the profitability of a projected investment or project.
A positive NPV indicates that the projected earnings generated by a project or investment. An
investment with a negative NPV will result in a net loss.
STEP 1:
Assume the yearly cash flows are earned at the end of the year, with the first payment arriving
exactly one year after the equipment has been purchased. This is a future payment, so it needs to
be adjusted for the time value of money. An investor can perform this calculation easily with a
spreadsheet.
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STEP 2:
=NPV (rate,value1,value2…..)
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4.Acconting rate of return
What is ARR?
Accounting Rate of Return (ARR) is the percentage rate of return that is expected from an
investment or asset compared to the initial cost of investment, ARR is used to make capital
budgeting decisions.
First off, work out the annual net profit of your investment. This will be the revenue remaining
after all operating expenses, taxes, and interest associated with implementing the investment or
project have been deducted.
If the investment is a fixed asset, such as property, you’ll need to work out the depreciation
expense.
Then, to arrive at the final figure for annual net profit, simply subtract the depreciation expense
from your annual revenue figure.
Finally, you simply divide the annual net profit by the initial cost of the asset or investment. The
calculation will show a decimal, so multiply the result by 100 to see the percentage return.
GIVEN: -
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5.Internal Rate of Return,
The Internal Rate of Return (IRR) is the discount rate that makes the net present value (NPV) of
a project zero. In other words, it is the expected compound annual rate of return that will be
earned on a project or investment. In the example below, an initial investment of $50 has a 22%
IRR. That is equal to earning a 22% compound annual growth rate.
PURPOSE OF IRR
When calculating IRR, expected cash flows for a project or investment are given and the NPV
equals zero. Put another way, the initial cash investment for the beginning period will be equal to
the present value of the future cash flows of that investment. (Cost paid = present value of future
cash flows, and hence, the net present value = 0).
Once the internal rate of return is determined, it is typically compared to a company’s hurdle
rate or cost of capital. If the IRR is greater than or equal to the cost of capital, the company
would accept the project as a good investment. (That is, of course, assuming this is the sole basis
for the decision.
In reality, there are many other quantitative and qualitative factors that are considered in an
investment decision.) If the IRR is lower than the hurdle rate, then it would be rejected.
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INTERPRETATION
STEP 1: Firstly, we need to enter the cash flows which are given below:
Example 1
For an initial investment of 1,000,000, the cash flows are given below:
Q. YEARS INCOME
1 (1,00,000)
2 1,50,000
3 1,50,000
4 1,50,000
5 1,50,000
6 1,50,000
7 2,50,000
8 2,50,000
9 2,50,000
10 3,50,000
11 3,50,000
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The initial investment here is a negative value as it is an outgoing payment. The cash inflows are
represented by positive values.
STEP 2: Now, we would simply select the data from B1:B11 to get IRR , =IRR(B1:B11)
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CONCLUSION
However, since it is based on speculative figures, it might differ from the actual profitability.
As perhaps substantiated in the example above, a higher IRR indicates better profitability of an
outlay. Therefore, analysts use this metric to compare varying projects to determine which one
would be worth the while and money.
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20. COST OF CAPITAL
INTRODUCTION
Cost of capital is the required return necessary to make a capital budgeting project, such as
building a new factory, worthwhile. ... It refers to the cost of equity if the business is financed
solely through equity, or to the cost of debt if it is financed solely through debt.
SIGNIFINACE
The cost of capital aids businesses and investors in evaluating all investment opportunities. It
does so by turning future cash flows into present value by keeping it discounted. The cost of
capital can also aid in making key company budget calls that use company financial sources
as capital
Costs can have different relationships to output. Costs also are used in different business
applications, such as financial accounting, cost accounting, budgeting, capital budgeting, and
valuation. Consequently, there are different ways of categorizing costs according to their
relationship to output as well as according to the context in which they are used. Following this
summary of the different types of costs are some examples of how costs are used in different
business applications.
The two basic types of costs incurred by businesses are fixed and variable. Fixed costs do not
vary with output, while variable costs do. Fixed costs are sometimes called overhead costs. They
are incurred whether a firm manufactures 100 widgets or 1,000 widgets. In preparing a budget,
fixed costs may include rent, depreciation, and supervisors' salaries. Manufacturing overhead
may include such items as property taxes and insurance. These fixed costs remain constant in
spite of changes in output.
Variable costs, on the other hand, fluctuate in direct proportion to changes in output. In a
production facility, labor and material costs are usually variable costs that increase as the volume
of production increases. It takes more labor and material to produce more output, so the cost of
labor and material varies in direct proportion to the volume of output.
For many companies in the service sector, the traditional division of costs into fixed and variable
does not work. Typically, variable costs have been defined primarily as "labor and materials."
However, in a service industry labor is usually salaried by contract or by managerial policy and
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thus does not fluctuate with production. It is, therefore, a fixed and not a variable cost for these
companies. There is no hard and firm rule about what category (fixed or variable) is appropriate
for particular costs. The cost of office paper in one company, for example, may be an overhead
or fixed cost since the paper is used in the administrative offices for administrative tasks. For
another company, that same office paper may well be a variable cost because the business
produces printing as a service to other businesses, like Kinkos, for example. Each business must
determine based on its own uses whether an expense is a fixed or variable cost to the business.
In addition to variable and fixed costs, some costs are considered mixed. That is, they contain
elements of fixed and variable costs. In some cases the cost of supervision and inspection are
considered mixed costs.
Direct costs are similar to variable costs. They can be directly attributed to the production of
output. The system of valuing inventories called direct costing is also known as variable costing.
Under this accounting system only those costs that vary directly with the volume of production
are charged to products as they are manufactured. The value of inventory is the sum of direct
material, direct labor, and all variable manufacturing costs.
Indirect costs, on the other hand, are similar to fixed costs. They are not directly related to the
volume of output. Indirect costs in a manufacturing plant may include supervisors' salaries,
indirect labor, factory supplies used, taxes, utilities, depreciation on building and equipment,
factory rent, tools expense, and patent expense. These indirect costs are sometimes referred to as
manufacturing overhead.
Under the accounting system known as full costing or absorption costing, all of the indirect costs
in manufacturing overhead as well as direct costs are included in determining the cost of
inventory. They are considered part of the cost of the products being manufactured.
The concepts of product and period costs are similar to direct and indirect costs. Product costs
are those that the firm's accounting system associates directly with output and that are used to
value inventory. Period costs are charged as expenses to the current period. Under direct costing,
period costs are not viewed as costs of the products being manufactured, so they are not
associated with valuing inventories.
If the firm uses a full cost accounting system, however, then all manufacturing costs—including
fixed manufacturing overhead costs and variable costs—become product costs. They are
considered part of the cost of manufacturing and are charged against inventory.
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Other Types of Costs
These are the basic types of costs as they are used in different accounting systems.
In budgeting it is useful to identify controllable and uncontrollable costs. This simply means that
managers with budgetary responsibility should not be held accountable for costs they cannot
control.
Financial managers often use the concepts of out-of-pocket costs and sunk costs when evaluating
the financial merits of specific proposals. Out-of-pocket costs are those that require the use of
current resources, usually cash. Sunk costs have already been incurred. In evaluating whether or
not to increase production, for example, financial managers may take into account the sunk costs
associated with tools and machinery as well as the out-of-pocket costs associated with adding
more material and labor.
Financial planning efforts utilize the concepts of incremental and opportunity costs. Incremental
costs are those associated with switching from one level of activity or course of action to
another. Incremental costs represent the difference between two alternatives. Opportunity costs
represent the sacrifice that is made when the means of production are used for one task rather
than another, or when capital is used for one investment rather than another. Nothing can be
produced or invested without incurring an opportunity cost. By making one investment or
production decision using limited resources, one necessarily forgoes the opportunity to use those
resources for a different purpose. Consequently, opportunity costs are not usually factored into
investment and production decisions involving resource allocation.
Imputed Costs—
Also of use to financial planners are imputed costs. These are costs that are not actually incurred,
but are associated with internal transactions. When work in process is transferred from one
department to another within an organization, a method of transfer pricing may be needed for
budgetary reasons. Although there is no actual purchase or sale of goods and materials, the
receiving department may be charged with imputed costs for the work it has received. When a
company rents itself a building that it could have rented to an outside party, the rent may be
considered an imputed cost.
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WACC
WACC Formula is a calculation of a firm’s cost of capital in which each category is proportionally
weighted. It is the average rate that a company is expected to pay to its stakeholders to finance its
assets. In simple terms the minimum return that the firm should earn on the existing asset base so
that the investors and lenders are interested, or they will invest elsewhere.
Basic terminology of the WACC Formula is as follows –
Assume a firm Photon limited that needs to raise capital to buy machinery, land for office space
and recruit more staff to conduct day to day business activities. Let’s say that the firm decided that
it needs an amount of $ 1 million for the same. The firm can raise capital through 2 sources –
Equity and Debt.
It issues 50,000 shares at $ 10 each and raises $ 500,000 through equity. As investors expect a
return of 7 %, the cost of equity is 7 %.
For the remaining $ 500,000, firm issues 5000 bonds at $ 100 each. The bondholders expect a
return of 6%, hence Photon’s cost of debt will be 6 %.
Additionally, let’s assume the effective tax rate is 35%.
Substituting these values in the WACC
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I.e. WACC formula = (500,000/1,000,000 * 0.07) + (500,000/1,000,000 * 0.06) * (1 – 0.35)
So, the result will be:
CONCLUSION
The cost of capital may be computed using debt, equity, and weighted average formulas and is
useful in making capital budgeting decisions. A proposal is not accepted if its rate of return is less
than the cost of capital. Financial performance and investment acceptability may be determined
from analyzing the discounted cash flows.
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21. FORECASTING METHODS
MOVING AVERAGE
INTRODUCTION
In statistics, a moving average is a calculation used to analyse data points by creating a series of
averages of different subsets of the full data set. In finance, a moving average (MA) is a stock
indicator that is commonly used in technical analysis. The reason for calculating the moving
average of a stock is to help smooth out the price data by creating a constantly updated average
price.
SIGNIFICANCE
A moving average (MA) is a widely used technical indicator that smooths out price trends by
filtering out the “noise” from random short-term price fluctuations. Moving averages can be
constructed in several different ways, and employ different numbers of days for the averaging
interval.
CONCLUSION Risk and uncertainty are central to forecasting and prediction; it is generally
considered good practice to indicate the degree of uncertainty attaching to forecasts. In any case,
the data must be up to date in order for the forecast to be as accurate as possible. In some cases
the data used to predict the variable of interest is itself forecast
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EXPOTENTIAL
INTRODUCTION
Exponential is a rule of thumb technique for smoothing time series data using the
exponential window function. Whereas in the simple moving average the past observations are
weighted equally, exponential functions are used to assign exponentially decreasing weights over
time. It is an easily learned and easily applied procedure for making some determination based
on prior assumptions by the user, such as seasonality. Exponential smoothing is often used for
analysis of time-series data.
SIGNIFICANCE
There are many forecasting methods, and exponential is just one of them. Exponential is a
technique used to detect significant changes in data by considering the most recent data. Also
known as averaging, this method is used in making short-term forecasts.
SYNTAX:- PV=FV/(1+r)^t
FORMULA:- =C1/(1+C2)^C3
SYNTAX:- FV=PV*(1+r)^t
FORMULA:- =E1*(1+E2)^E3
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22. RATIO ANALYSIS
INTRODUCTION
Ratio analysis is a quantitative procedure of obtaining a look into a firm's functional efficiency,
liquidity, revenues, and profitability by analyzing its financial records and statements. Ratio
analysis is a very important factor that will help in doing an analysis of the fundamentals of
equity.
SIGNIFICANCE
Ratio Analysis is important for the company in order to analyze its financial position, liquidity,
profitability, risk, solvency, efficiency, and operations effectiveness and proper utilization of
funds which also indicates the trend or comparison of financial results that can be helpful for
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CURRENT RATIO
QUICK RATIO
CASH RATIO
DEBT RATIO
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RECEIVABLES TURNOVER RATIO
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GROSS MARGIN RATIO
CONCLUSION
Ratio analysis compares line-item data from a company's financial statements to reveal insights
regarding profitability, liquidity, operational efficiency, and solvency. Ratio analysis can mark
how a company is performing over time, while comparing a company to another within the same
industry or sector.
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23. EARNING PER SHARE
INTRODUCTION
● After researching company XYZ extensively, Dan wants to see how its EPS ratio stacks
up to similar businesses in the industry before moving forward. His research shows XYZ
has a net income of $5 million, preferred share dividends of $1.5 million and 700,000 total
common shares outstanding. Calculate the EPS
CONCLUSION
EPS indicates how much money a company makes for each share of its stock and is a widely
used metric for estimating corporate value. A higher EPS indicates greater value because
investors will pay more for a company's shares if they think the company has higher profits
relative to its share price. EPS can be arrived at in several forms, such as excluding extraordinary
items or discontinued operations, or on a diluted basis.
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24. VALUATION METHOD
Valuation is the analytical process of determining the current (or projected) worth of an asset or a
company. There are many techniques used for doing a valuation. An analyst placing a value on a
company looks at the business's management, the composition of its capital structure, the
prospect of future earnings, and the market value of its assets, among other metrics.
Discounted cash flow (DCF) is a valuation method used to estimate the value of an investment
based on its expected future cash flows. DCF analysis attempts to figure out the value of an
investment today, based on projections of how much money it will generate in the future.
The purpose of DCF analysis is to estimate the money an investor would receive from an
investment, adjusted for the time value of money. The time value of money assumes that a dollar
today is worth more than a dollar tomorrow because it can be invested. As such, a DCF analysis
is appropriate in any situation wherein a person is paying money in the present with expectations
of receiving more money in the future.
For example, assuming a 5% annual interest rate, $1 in a savings account will be worth $1.05 in
a year. Similarly, if a $1 payment is delayed for a year, its present value is 95 cents because you
cannot transfer it to your savings account to earn interest.
DCF analysis finds the present value of expected future cash flows using a discount rate.
Investors can use the concept of the present value of money to determine whether the future cash
flows of an investment or project are equal to or greater than the value of the initial investment.
If the value calculated through DCF is higher than the current cost of the investment, the
opportunity should be considered.
In order to conduct a DCF analysis, an investor must make estimates about future cash flows and
the ending value of the investment, equipment, or other asset. The investor must also determine
an appropriate discount rate for the DCF model, which will vary depending on the project or
investment under consideration, such as the company or investor's risk profile and the conditions
of the capital markets. If the investor cannot access the future cash flows, or the project is very
complex, DCF will not have much value and alternative models should be employed.
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COMPARABLE TRADING MULTIPLES
Analyzing comparable trading multiples (Comps) involves analyzing companies with similar
operating, financial, and ownership profiles to provide a useful understanding of: Operating
and financial statistics about an industry group (growth rates, margin trends, capital spending
requirements, etc.).
PRECEDENT TRANSACT
CONCLUSION
Valuation is a quantitative process of determining the fair value of an asset or a firm.In general, a
company can be valued on its own on an absolute basis, or else on a relative basis compared to
other similar companies or assets. There are several methods and techniques for arriving at a
valuation—each of which may produce a different value. Valuations can be quickly impacted by
corporate earnings or economic events that force analysts to retool their valuation models.
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25. MARKET BASED METHODS
ENTERPRISE VALUE (EV):
Enterprise Value (EV), also referred to as Business Enterprise Value (BEV), reflects the entire
business's market value. In laymen's terms, it's the amount an acquirer would have to pay to buy
a business. In valuation terms, enterprise value represents the market value of the company's to
company's total operating assets.
It is equal to:
Market Capitalization
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EARNINGS BEFORE INTEREST AND TAXES (EBIT)
EBIT is the earnings of a business before interest and tax. It is therefore also referred to as
‘operating profit’. The result of the EBIT is an important figure for businesses because it provides
a clear idea of the earning ability.
• EBIT (earnings before interest and taxes) is a company's net income before income tax
expense and interest expenses are deducted.
• EBIT is used to analyze the performance of a company's core operations without the costs
of the capital structure and tax expenses impacting profit.
EXAMPLE
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Steps to calculate EBIT:
1. Firstly, we need to ENTER the data as shown in the above image in our excel sheet.
2. Now, we will be calculate the VALUE OF FIRM. In this case the VALUE OF FIRM is
2500000 (as given in the question )
= (G2-G4)*G3
=E11/(1-G6)
INTERPRETATION
As you can see from our example, this is a pretty simple metric to calculate, but it tells us a lot
about the company and its financial position without taking into consideration the financing
structure of the company. By looking at the operating earnings of a company, rather than the net
income, we can evaluate how profitable the operations are without considering at the cost of debt
(interest expense).
Investors compare the EBIT metrics of different companies because it shows them how efficient
and successful the operating activities of the companies are without regard to their debt obligations.
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EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AND
AMORTIZATION (EBITDA):
It is a commonly used metric in valuation since it gives analysts a clearer picture of operating
profitability when comparing companies with different capital structures.
It is equal to:
The EV/EBITDA ratio is a comparison of enterprise value and earnings before interest, taxes,
depreciation and amortization. This is a very commonly used metric for estimating the business
valuations. It compares the value of a company, inclusive of debt and other liabilities, to the
actual cash earnings exclusive of the non-cash expenses.
This ratio is also known as “enterprise multiple” and “EBITDA multiple”. The enterprise
multiple can be used compare the value of one company to the value of another company within
the same industry. A lower enterprise multiple can be indicative of an undervaluation of a
company.
Calculation (Formula)
The EV/EBITDA ratio is calculated by dividing the enterprise value (EV) by earnings before
interest, taxes, depreciation, and amortization (EBITDA).
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The EV/EBITDA ratio is a better measure than the P/E ratio because it is not affected by changes
in the capital structure. Consider a scenario in which a company raises equity finance and uses
these funds to repay the loans. This will usually result in a lower earnings per share (EPS) and
therefore a higher P/E ratio. But the EV/EBITDA ratio will not be affected by this change in
capital structure.
This means that the EV/EBITDA ratio cannot be manipulated by the changes in capital structure.
Another benefit of the EV/EBITDA ratio is that it makes possible fair comparison of companies
with different capital structures.
Another positive aspect to the EV/EBITDA ratio is that it removes the effect of non-case
expenses such as depreciation and amortization. These non-cash items are of less significance to
the investors because they are ultimately interested in the cash flows.
The enterprise value-to-revenue multiple (EV/R) is a measure of the value of a stock that
compares a company's enterprise value to its revenue. EV/R is one of several fundamental
indicators that investors use to determine whether a stock is priced fairly. The EV/R multiple is
also often used to determine a company's valuation in the case of a potential acquisition. It’s also
called the enterprise value-to-sales multiple.
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Understanding Enterprise Value-to-Revenue Multiple (EV/R)
The enterprise value-to-revenue (EV/R) multiple helps compare a company’s revenues to its
enterprise value. The lower the better, in that, a lower EV/R multiple signals a company is
undervalued.
Generally used as a valuation multiple, the EV/R is often used during acquisitions. An acquirer
will use the EV/R multiple to determine an appropriate fair value. The enterprise value is used
because it adds debt and takes out cash, which an acquirer would take on and receive,
respectively.
The enterprise value-to-revenue (EV/R) is easily calculated by taking the enterprise value of the
company and dividing it by the company's revenue.
CONCLUSION
This is a well-known way of calculating the theoretical value of a company and its stock. Many
investors and analysts recommend carrying out some level of market-based valuation before
deciding to invest in a company, and it’s possible you may have done it in some way yourself.
For example, examining the selling price of similar items could be seen as a form of market-
based valuation. Value, fair value, intrinsic value, ‘the theory of investment value’ and tax
amortisation benefit are all various types of valuation.
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26. SENSITIVITY ANALYSIS
INTRODUCTION
Sensitivity analysis is a financial model that determines how target variables are affected based
on changes in other variables known as input variables. This model is also referred to as what-if
or simulation analysis. It is a way to predict the outcome of a decision given a certain range of
variables.
1. Select cell D3 and type =B17 (refer to the operating profit cell).
2. Select the range E4:I9.
3. On the Data tab, in the Forecast group, click What-If Analysis.
4. Click Data Table.
5. Click in the 'Column input cell' box and select cell B6. 'Row input cell' box and select cell B5.
6. Click OK.
CONLUSION
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27. PROBABILITY ANALYSIS
INTRODUCTION
Probability Analysis — a technique used by risk managers for forecasting future events, such as
accidental and business losses. This process involves a review of historical loss data to calculate
a probability distribution that can be used to predict future losses. This type of analysis is
contrasted to trend analysis.
1. Step 1: Find the number for both the events in the question happening together. ...
2. Step 2: Divide your answer in step 1 by the total figure. ...
3. Step 3: Identify which event happened first (i.e. find the independent variable)
CONCLUSION
Probability Analysis is used for risk management and is one of the techniques that can be used in
the Risk Assessment process. Although there are many statistical techniques available to the
project manager that can assist in assessing project risk, probability analysis is one of the more
common ones. Decision trees have been used to assess alternative courses or action using
expected values calculated by probability analysis. It is strictly connected to the Risk Assessment
process and is not a step in our Risk Management Framework.
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