INTRODUCTION TO FINANCIAL MODELLING

Financial modeling is a crucial tool used by professionals in finance, investment banking, corporate
finance, and other related fields to make informed decisions about investments, business operations,
and strategic planning. Essentially, financial modeling involves building mathematical representations
of financial situations and scenarios to analyze and forecast outcomes.

Here's an introductory overview of financial modeling:

1. Purpose: Financial modeling helps understanding the potential financial performance of a business,
project, or investment opportunity. It aids in decision-making by providing insights into the potential
risks and returns associated with various courses of action.

2. Components:A financial model typically includes arious components such h as historical financial
data, assumptions about future performance, formulas and calculations, and output metrics. These
components are integrated into a coherent framework to simulate different scenarios and outcomes.

3. Types of Models: Financial models can vary widely depending on their purpose and complexity.
Common types include:

- Valuation Models: Used to estimate the value of a business, asset, or investment.

-Forecasting Models: Predict future financial performance based on historical data and assumptions
about future conditions.

-Budgeting Models: Aid in planning and managing budgets for businesses or projects.

-Merger & Acquisition (M&A) Models: Assess the financial implications of mergers, acquisitions,
or divestitures

-Risk Models: Evaluate the potential risks and their impact on financial outcomes.

4. Tools: Financial models are often created using spreadsheet software like Microsoft Excel, although
more advanced models may be built using specialised financial modeling software. Excel is widely
preferred due to its flexibility, familiarity, and accessibility.

5. Best Practices:

-Simplicity: Keep models as simple as possible while still capturing the essential aspects of the
situation.

-Transparency: Document assumptions, methodologies, and sources of data to ensure transparency

and reproducibility.

-Flexibility: Design models to accommodate changes in assumptions or inputs easily.

-Accuracy: Validate models using historical data sensitivity analysis to ensure accuracy and

reliability.

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-User-friendliness: Ensure that the model is user-friendly and understandable for stakeholders who
may not have expertise in financial modeling.

6. Applications: Financial modeling is used in various s areas including:

- Corporate finance: Budgeting, strategic planning, and investment analysis.

- Investment banking: Valuation of companies, IPO analysis, and merger modeling.

- Real estate: Property valuation, feasibility analysis, and investment decision-making.

- Portfolio management: Risk assessment, asset allocation, and performance tracking.

In conclusion, financial modeling is a powerful tool for analyzing and predicting financial outcomes,
enabling informed decision-making across various domains in finance and business. Mastering
financial modeling requires a combination of technical skills, financial knowledge, and critical
thinking abilities.

Features of Financial Modeling:

1. Flexibility: Models can be adjusted easily to incorporate changes in assumptions or scenarios.

2. Customization: Tailored to specific needs, whether it's valuation, forecasting, budgeting, or risk
analysis.

3. Integration: Combines data from various sources to provide a comprehensive view of financial
situations.

4. Accuracy: When appropriately constructed and validated, models can provide accurate predictions
and insights.

5. Scalability: Models can be scaled up or down in complexity depending on the requirements and
available resources.

Advantages of Financial Modeling:

1. Informed Decision Making: Helps decision-makers assess the potential outcomes of various
financial strategies, investments, or business decisions.

2. Risk Management: Enables the identification and quantification of financial risks, allowing for the
development of mitigation strategies.

3. Resource Allocation: Aids in the efficient allocation of resources by prioritizing investments or

projects based on their expected financial returns.

4. Communication Tool: Provides a structured framework for communicating financial information

and strategies to stakeholders, investors, and management.

5. Strategic Planning: Facilitates long-term strategic planning by forecasting financial performance

under different scenarios and assumptions.

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Disadvantages of Financial Modeling:

1. Complexity: Developing and understanding complex financial models requires specialized skills
and knowledge, which may be challenging for some users.

2. Assumption Sensitivity: Results are highly dependent on the accuracy of assumptions, and small
changes in inputs can lead to significant variations in outcomes.

3. Data Limitations: Relies heavily on historical data and assumptions about future trends, which may
not always accurately reflect real-world conditions.

4. Over-reliance: Users may become overly reliant on models, leading to a false sense of certainty or
neglect of qualitative factors that can impact financial outcomes.

5. Time and Resources: Constructing and maintaining sophisticated financial models can be time-
consuming and resource-intensive, especially for large or complex projects.

Uses of Financial Modeling:

1. Valuation: Estimating the value of companies, assets, or investment opportunities using various
valuation techniques such as discounted cash flow (DCF) analysis or comparable company analysis
(CCA).

2. Forecasting: Predicting future financial performance based on historical data, industry trends, and
economic factors.

3. Budgeting and Planning: Creating budgets, financial plans, and forecasts to guide resource
allocation and strategic decision-making.

4. Investment Analysis: Assessing the financial viability and potential returns of investment
opportunities, including stocks, bonds, real estate, and projects.

5. Risk Management: Identifying, quantifying, and managing financial risks through techniques such
as sensitivity analysis, scenario analysis, and Monte Carlo simulation.

6. Mergers and Acquisitions (M&A): Evaluating the financial implications of mergers, acquisitions,
or divestitures, including synergies, valuation, and financing options.

Financial modeling is a versatile tool with numerous applications across various domains in finance
and business. While it offers significant advantages in terms of informed decision-making and risk
management, it also comes with challenges such as complexity, reliance on assumptions, and resource
requirements. Understanding these features, advantages, disadvantages, and uses is essential for
effectively leveraging financial modeling in practice.

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UNIT 1
VLOOKUP AND MATCH FUNCTION

The VLOOKUP and MATCH functions are both used to search within Excel, and they can be used
together to create a dynamic function that can overcome certain challenges. The VLOOKUP function
is used to search for information in a specified table. After inserting the row and column into the
function, the formula returns the information in the overlapping cell. The MATCH function plays a
similar role in searching for information. However, its job is to return the number of the row or column
where the input information is found.

We will use same steps we use in Vlookup, but this time instead of writing col_num we will use match
Function and it will show us complete data we required in single time.

VLOOKUP AND INDEX FUNCTION

VLOOKUP must be utilized for looking into values from Left to Right. INDEX MATCH can look into
the qualities from Left to Right as well as Right to Left. VLOOKUP just can query through vertical
lines, for example, segments, and not through columns. INDEX MATCH can query values through
lines as well as segments.

Index match function is used when the column data of data-array and the data we have is different.

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We will use same steps we use in Vlookup, but this time instead of writing col_num we will use Match
Index Function.

VLOOKUP AND IF
VLOOKUP is one of the most powerful functions in Excel. It is used to look up data in a table that is
organized vertically. Here, a specific value is looked up in one table column and returns the
corresponding value from another. When we combine VLOOKUP with IF Statement, it helps check
for specified conditions making it a powerful combination.
For instance, below is a table containing the names of 3 students. We must look up their marks and
announce the result accordingly. Enter the formula =IF(VLOOKUP(“Danny”, A1:B4,2, FALSE) > 50,
“Pass”, “Fail”) in cell B5. Here we are looking up the name of Danny in Column A and then finding
his corresponding marks. If it exceeds 50, he is declared “Pass”; else, “Fail.”

Syntax for Vlookup and If Function: IF(VLOOKUP(…) = value, TRUE, FALSE)

OFFSET FUNCTION
The OFFSET Function is categorised under Excel Lookup and Reference functions. OFFSET will
return a range of cells. That is, it will return a specified number of rows and columns from an initial
range that was specified.

In financial analysis, we often use Pivot Tables and Charts. The offset function can be used to build a
dynamic named range for pivot tables or charts to make sure that the source data is always up to date.

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Let’s say we are given the weekly earnings for 5 weeks below:

suppose we want the sum total of the earnings for Week 3. We use the formula
=SUM(OFFSET(G6,1,-2,5)).

We get the results below:

Syntax for Offset Function = OFFSET(reference, rows, cols, [height], [width])

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SENSITIVITY ANALYSIS USING DIFFERENT WAY

Sensitivity analysis determines how different values of an independent variable affect a particular
dependent variable under a given set of assumptions. In other words, sensitivity analyses study how
various sources of uncertainty in a mathematical model contribute to the model's overall uncertainty.
This technique is used within specific boundaries that depend on one or more input variables.

Step-1 Calculate Revenue

Step 2: After that Calculate Cost of Sales

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Step 3: Calculate Gross Profit by subtracting Revenue from Cost of Sales

Step 4: Then calculate Selling, General and administrative Expenses (SG&A)

Step 5: Calculate Operating Profit by SG&A from Gross Profit

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Now, To find out Operating Profit on different Volume and Price There are few steps

Select Data which you want to find out < Click on Data Tab Then select What if analysis and then
click on Data Table Then this Dialog box will open, In this Table Select Price in row input cell and
Cost in column input cell and then Click Ok

· You will get Operating Profit on different level of price and volume

Then, Find out Maximum and minimum Value which will show on which Price and value it will has
maximum and minimum Operating Profit

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SCENARIO MANAGER

A scenario is a set of input values that you can substitute in a worksheet to perform what-if analysis.
For example, you could create scenarios to show various interest rates, loan amounts, and terms for a
mortgage. Excel’s scenario manager lets you create and store different scenarios in the same
worksheet.
Steps to use Scenario Manager
1. Select the cells that contain values that could change.
2. Click the Data tab on the ribbon.
3. Click the What-If Analysis button.
4. Select Scenario Manager.
The Scenario Manager dialog box appears with the message “No Scenarios defined. Choose Add to
add scenarios.
5. Click the Add button to add a new scenario.

6. Type a name for the new scenario.

- If you already have cells selected, the Changing cells field will already be populated with your
selection. If you didn’t select cells up front, you’ll have to specify the cells here.
7. Click OK.

The Scenario Values dialog box appears, showing each of the variable cells you selected. If you name

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the worksheet cells you're changing, the cell names appear here, making it easy to tell what value
you're working with.
8. Update any values you want to see for the given scenario.
To make sure you don’t lose the original values for the changing cells, use the original cell values in
the first scenario you create.

​9. Click OK.

The scenario is added and is listed in the Scenario Manager. If you click Add, the Add Scenario dialog
box appears again so you can add another scenario.
Repeat steps 5-9 to add all the desired scenarios.

​10. Select the scenario you want to view.

​11. Click the Show button.

The worksheet’s values are changed to the values you specified in the scenario. You can select any
scenario here to update the values in your spreadsheet.

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ITERATIVE CALCULATIONS

Unless you're familiar with iterative calculations, you probably won't want to keep any circular
references intact. If you do, you can enable iterative calculations, but you need to determine how many
times the formula should recalculate. When you turn on iterative calculations without changing the
values for maximum iterations or maximum change, Excel stops calculating after 100 iterations, or
after all values in the circular reference change by less than 0.001 between iterations, whichever comes
first. However, you can control the maximum number of iterations and the amount of acceptable
change.

1. Select File > Options > Formulas. If you're using Excel for Mac, select the Excel menu, and then
select Preferences > Calculation.

2. In the Calculation options section, select the Enable iterative calculation check box. On the Mac,
select Use iterative calculation.

3. To set the maximum number of times that Excel will recalculate, type the number of iterations in the
Maximum Iterations box. The higher the number of iterations, the more time that Excel needs to
calculate a worksheet.

4. In the Maximum Change box, type the smallest value required for iteration to continue. This is the
smallest change in any calculated value. The smaller the number, the more precise the result and the
more time that Excel needs to calculate a worksheet.

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CORRELATION WITH SPREADSHEETS

To calculate the correlation in an Excel spreadsheet, you can use the CORREL() function.

Let’s look at an example.

Consider these two lists of data in an Excel spreadsheet:

To determine the correlation between them:

1. Select a blank cell at the bottom of column B and enter the formula: =CORREL(A2:A7, B2:B7)
where A2:A7, B2:B7 represent the range of data to include.

2. Click Enter.

3. Excel calculates the correlation coefficient.

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REGRESSION USING SPREADSHEET

The following steps show how to set up and run a linear regression in recent versions of Microsoft
Excel. It’s possible in other spreadsheet tools like Google Sheets or Zoho Sheets as well—the steps are
generally similar, but the details will vary.

Input Historical Values Into Excel

1. On the Data tab, in the Analysis group, click Data Analysis.

Note: can't find the Data Analysis button? Click here to load the Analysis ToolPak add-in.

2. Select Regression and click OK.

3. Select the Y Range (A1:A8). This is the predictor variable (also called dependent variable).

4. Select the X Range(B1:C8). These are the explanatory variables (also called independent variables).
These columns must be adjacent to each other.

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5. Check Labels. <Click in the Output Range box and select cell A11. <Check Residuals. < Click OK.

Excel produces the following Summary Output (rounded to 3 decimal places).

R Square: R Square equals 0.962, which is a very good fit. 96% of the variation in Quantity Sold is
explained by the independent variables Price and Advertising. The closer to 1, the better the regression
line (read on) fits the data.

Significance F and P-values

To check if your results are reliable (statistically significant), look at Significance F (0.001). If this
value is less than 0.05, you're OK. If Significance F is greater than 0.05, it's probably better to stop
using this set of independent variables. Delete a variable with a high P-value (greater than 0.05) and
rerun the regression until Significance F drops below 0.05.

Most or all P-values should be below below 0.05. In our example this is the case. (0.000, 0.001 and
0.005).

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COEFFICIENTS: The regression line is: y = Quantity Sold = 8536.214 -835.722 * Price + 0.592 *
Advertising. In other words, for each unit increase in price, Quantity Sold decreases with 835.722
units. For each unit increase in Advertising, Quantity Sold increases with 0.592 units. This is valuable
information.

You can also use these coefficients to do a forecast. For example, if price equals $4 and Advertising
equals $3000, you might be able to achieve a Quantity Sold of 8536.214 -835.722 * 4 + 0.592 * 3000
= 6970.

RESIDUAL: The residuals show you how far away the actual data points are fom the predicted data
points (using the equation). For example, the first data point equals 8500. Using the equation, the
predicted data point equals 8536.214 -835.722 * 2 + 0.592 * 2800 = 8523.009, giving a residual of
8500 - 8523.009 = -23.009.

You can also create a scatter plot of these residuals.

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VARIANCE USING SPREADSHEET
To calculate variance in Excel, you will need to have your data set already entered into the software.
Once you have your data, you can choose your formula based on the type of data set you have and the
type of variance you need to calculate.

There are a few different options for the formula to calculate variance in Excel:

● =VAR.S(select data)

● =VARA(select data)

● =VAR.P(select data)

For each of these, you would select the range of cells you want to use after the parentheses.In the
example below, we will calculate the variance of 20 days of daily returns in the highly popular
exchange-traded fund (ETF) named SPY, which invests in the S&P 500.1 We will use the following
formula:

=VAR.S(select data)

In this instance, if we had all returns in the history of the SPY ETF in our table, we could use the
population measurement VAR.P. However, since we are only measuring the last 20 days to illustrate
the concept, we will use VAR.S.

As you can
see, the calculated variance value of .000018674 tells us little about the data set, by itself. If we went
on to square root that value to get the standard deviation of returns, that would be more useful.

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HOW TO SUMMARISE DATA FROM MULTIPLE WORKSHEETS IN EXCEL

You might have data in several Excel sheets that you need to be consolidated into one central location.
Fortunately, you can to produce a Master Sheet with summaries and other totals from several different
source sheets.
In the example below we want to link the contents of cells B12 and B13 to an output summary. It is
quicker and easier if each source tab has a similar layout so you are linking to the same cells on each
of the source tabs.

Excel summary sheet

This must include both the tab names (company names) and the cell references from the other tabs that
you want to link across to.
Write the formula as shown below

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UNIT II
Bar Chart

A bar chart or bar graph is a chart or graph that presents categorical data with rectangular bars
with heights or lengths proportional to the values that they represent. The bars can be plotted
vertically or horizontally. A vertical bar chart is sometimes called a column chart.

Genre January February March April May

Classics $18,580 $49,225 $16,326 $10,017 $26,134

Mystery $78,970 $82,262 $48,640 $49,985 $73,428

Romance $24,236 $131,390 $79,022 $71,009 $81,474

Sci-Fi &
Fantasy $16,730 $19,730 $12,109 $11,355 $17,686

Young Adult $35,358 $42,685 $20,893 $16,065 $21,388

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PICTURES AS LINKED OBJECTS IN SPREADSHEET

To insert a picture link to your data, just follow these 3 steps:

1. Select the cells. Press CTRL+C

2. Go to a target cell. From home ribbon select Paste > As picture > Picture link
option (see image below)

3. That is all. Your picture link is live. Move it or play with it by changing source
cells.

Dynamic Chart Range

Here are the steps.

1. Go to Formulas Tab -> Defined Names -> Name Manager.

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 2. Click on “New” to create a named range.

3. Now, in the new name window, enter the following formula (I will tell you
further how it work).

● =OFFSET(Sheet2!$B$2,0,0,COUNTA(Sheet2!$B:$B)-1,1)

4. Name your range “amount”.

5. Click OK.

6. Now, create another named range by using following formula.

=OFFSET(Sheet2!$A$2,0,0,COUNTA(Sheet2!$A:$A)-1,1)

7. Name it “month”.

8. Click Ok.

At this point, we have two named ranges, “month” & “amount”. Now, let me tell you how it
works. In the above formulas, I have used the count function to count the total number of cells
with a value. Then I have used that count value as a height in offset to refer to a range.

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In the month range, we have used A2 as starting point for offset and counting the total number
of cells having in column B with counta (-1 to exclude heading) which gives reference to
A2:A7.

Here are the further steps.

1. Right click on your chart and select “Select Data”.

2. Under legend entries, click on edit.

3. In series values, change range reference with named range “amount”.

4. Click OK.

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 5. In horizontal axis, click edit.

6. Enter named range “months” for the axis label.

7. Click Ok.

All is done. now your chart has a dynamic range.

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CREATING DYNAMIC CHARTS USING NAME MANAGE
Creating Then vs. Now chart in Excel

1. Arrange data

As usual, the first step is to get the data in to Excel. Structure your data like this.

2. Insert a combo box control to select a region

Since our chart will display values for one region at a time, we need a mechanism to let user
control which region is displayed. We will use a combo box control do this. Follow these
steps.

1. Go to developer ribbon and insert combo box form control.

2. Right click on the combo box and go to format control.

3. Set up input range to list of regions in your data.

4. Set up cell link to a blank cell in your workbook.

3. Fetch selected region’s data

Now that we have a combo box to select which region to show in the chart, next step is to
fetch data for selected region. You can use either VLOOKUP or INDEX formulas to do it.

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Using VLOOKUP formula:

Assuming region name is in D17, and data is in values table, write:

=VLOOKUP(D17, values, 2, false)

to get 2nd column (then sales) value.

More on using VLOOKUP formula

Using INDEX formula:

Assuming region number is in D16, and data is in values table, write:

=INDEX(values[then],D16)

4. Create a chart showing then to now movement

Next step is to create a chart that would show a line going from then value to now value. Lets
take a closer look the line to understand how to make it in Excel.

We can create this chart with either XY (scatter) plot or line chart. Lets go with scatter plot.

In your workbook, set up a table like this:

Then, select the above and create a scatter plot. Select the scatter plot with connecting lines.

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5. Formatting the chart

Since we want to show a thick circle at the beginning of then value and arrow at the end of
now value, lets go ahead and do the formatting song and dance.

Formatting the first point:

1. Select the first point of then values (you need to click once on it, take 3 deep
breaths, click again and sacrifice a goat).

2. Press CTRL+1 to format the data point.

3. Go to Marker options and select built in marker and use the circle symbol.

Formatting the last point:

1. Select the last point (same as above, but this time sacrifice a chicken)

2. Format the data point.

3. Go to line style, select End type and choose arrow.

Formatting the horizontal axis:

1. Select horizontal (x) axis and press CTRL+1

2. Set axis minimum to 1, maximum to 6.

3. Click ok and delete the axis as we do not need it on the chart.

6. Adding “Break-up” of now values chart

This is easy, Just select fetched break-up values for selected region and create a bar chart.
Format it as per your fancy.

7. Put everything together

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Place the combo box, scatter plot and bar chart together in a nice fashion. Add a surrounding
box shape so that everything looks like one report.

Add a descriptive title on the top. If possible, make chart title dynamic so that you can show
the selected region name and % change in it.

8. Your Then vs. Now chart is ready

That is all. Your Then vs. Now chart is ready. Go ahead and flaunt it.

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WATERFALL CHART

A waterfall chart shows a running total as values are added or subtracted. It's useful for
understanding how an initial value (for example, net income) is affected by a series of
positive and negative values.

Create a waterfall chart

1. Select your data.

2. Click Insert > Insert Waterfall or Stock chart > Waterfall.

3. Here is the result

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THERMOMETER CHART

This example teaches you how to create a thermometer chart in Excel. A thermometer chart
shows you how much of a goal has been achieved.

To create a thermometer chart, execute the following steps.

1. Select cell B16.

Note: adjacent cells should be empty.

2. On the Insert tab, in the Charts group, click the Column symbol.

3. Click Clustered Column.

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Result:

Further customize the chart.

4. Remove the chart tile and the horizontal axis.

5. Right click the blue bar, click Format Data Series and change the Gap Width to 0%.

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6. Change the width of the chart.

7. Right click the percentages on the chart, click Format Axis, fix the minimum bound to 0,
the maximum bound to 1 and set the Major tick mark type to Outside.

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CREATING OF DASHBOARDS
The following tables show the monthly and quarterly sales (in $) of two pharmaceutical
companies–“Ajantha” and “Mankind.”

We want to compare the performance of the two companies with the help of a comparative
excel dashboard. The purpose is to examine the progress made by both the companies on the
revenue front.

The steps to create a dashboard in excel are listed as follows:

1. In column A, enter the sales of “Mankind”, followed by the corresponding month in

column B and the sales of “Ajantha” in column C.

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2. Select the whole data and create colored data bars. For this, increase the row height
from 15 to 25, as shown in the following image.

To open the “row height” box, press the excel shortcut key “Alt+HOH” one by one.

3. Select the sales data range of “Mankind”. In the Home tab, click the conditional
formatting drop-down. Select “data bars” and click “more rules”.

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4. The “new formatting rule” window appears. In “edit the rule description”, select the
“type” as “number” under both “minimum” and “maximum”.

In “value”, enter 0 and 9000 under “minimum” and “maximum” respectively.

5. In “bar appearance”, select the required color in the “color” option. In “bar direction”,
select “right-to-left”, as shown in the following image.

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6. Click “Ok”. In case you do not want numbers to appear with the colored data bars,
select “how bar only” under “edit the rule description”.
The colored data bars appear in each row of column A, as shown in the following
image.

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7. Likewise, create the same colored bars for the company “Ajantha”. In “bar direction”,
select “left-to-right”.
The colored bars appear in each row of column C, as shown in the following image.

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8. Similarly, create colored bars for the quarterly sales data of the two companies as well.
In “edit the rule description”, enter 25000 under “maximum”. Select a different color
in the “color” option under “bar appearance”.
The colored bars appear in each row of columns F and H, as shown in the following
image.
Hence, with the help of the colored bars, the user can glance through the monthly and
quarterly sales figures of both the companies.

In addition to the colored bars, the following comparison indicators can also be used
in a dashboard depending on user requirements.

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CONDITIONAL FORMATTING

Conditional formatting is a feature in Microsoft Excel that allows you to apply specific
formatting to your cells according to certain criteria. It enables you to make sense of your data
and spot significant trends.Conditional Formatting in Excel enables you to the cells with
certain color depending on the condition. It is an excellent way to visualize data in a
spreadsheet. You can also create rules with your own custom formulas. This guide will
provide you with step-by-step examples of the most popular conditional formatting functions.

What is Conditional Formatting?

Conditional formatting is a feature in Microsoft Excel that allows you to apply specific
formatting to your cells according to certain criteria. It enables you to make sense of your data
and spot significant trends.

Highlight Cells Using Conditional Formatting

Let’s start by highlighting the cells that have a value greater than 350. Execute the following
steps:

● Select the range of cells you want to apply the highlight.

● On the Home tab, under Styles Group, click Conditional Formatting.

● Click Highlight Cells Rules > Greater Than

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 ● Enter the desired value and select the formatting style.

● Click OK

Result:

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UNIT 3
CALCULATE NPV USING EXCEL

NPV (Net Present Value) is a financial formula used to discount future cash flows.

The calculation is performed to find out whether an investment is positive in the future.

Step 1) Create a sheet and set up values:

In this example, we will calculate the NPV over a 10 years period.

The Discount Rate, return of requirement is set to 10%.

Step 2) Start the NPV Function:

1. Select cell E9

2. Type =NPV

3. Select the =NPV function by clicking it

Step 3) Enter NPV Values:

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 1. Select B9 to Apply "rate"

2. Type , or ; to separate and move on to value

3. Select range B2:K2

4. Press the enter button

You
have successfully calculated the NPV for a 10 years period and applied a 10% Discount Rate.

In this case, the right answer was 377,87

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 IRR

For example, project A requires an initial investment of $100 (cell B5).

1. We expect a profit of $0 at the end of the first period, a profit of $0 at the end of the second
period and a profit of $152.09 at the end of the third period.

Note: the discount rate equals 10%. This is the rate of return of the best alternative
investment. For example, you could also put your money in a savings account at an interest
rate of 10%.

2. The correct NPV formula in Excel uses the NPV function to calculate the present value of a
series of future cash flows and subtracts the initial investment.

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Explanation: a positive net present value indicates that the project’s rate of return exceeds the
discount rate. In other words, it's better to invest your money in project A than to put your
money in a savings account at an interest rate of 10%.

3. The IRR function below calculates the internal rate of return of project A.

4. The internal rate of return is the discount rate that makes the net present value equal to
zero. To clearly see this, replace the discount rate of 10% in cell B2 with 15%.

Explanation: a net present value of 0 indicates that the project generates a rate of return equal
to the discount rate. In other words, both options, investing your money in project A or

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putting your money in a high-yield savings account at an interest rate of 15%, yield an equal
return.

5. We can check this. Assume you put $100 into a bank. How much will your investment be
worth after 3 years at an annual interest rate of 15%? The answer is $152.09.

Conclusion: you can compare the performance of a project to a savings account with an
interest rate equal to the IRR.

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Unit 4
WACC
In this example, you will notice the simple procedure of calculating the WACC in Excel. Let’s follow
the steps for WACC calculation:

Calculate We & Wd arguments.

In the next step, find the Cost of Equity (Ke).

First, you need to find the risk-free return values, market premium, and beta to calculate the
Ke for a weighted average cost of capital. Google can help you find the first two values.

Now, the formula for Ke will give the value:

0.08378

In the next step, you need to find the Cost of Debt Kd for WACC in Excel.

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To calculate the cost of debt Kd for WACC, you have to first find the Interest rate IR and Eff.
Tax rate. The Value of Kd would be:

0.02101768189

In the next step, finally, the WACC will be calculated.

Now, put all the values you have calculated in the Excel format and apply the formula as well.
You will get the value of WACC as:

0.0812445208 (8.12%)

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CAPM

Here, we will do the same example of the CAPM formula in Excel. It is very easy and simple.

You need to provide the three inputs, i.e., Risk-free rate, Beta of the investment, and Expected

return on the market.

You can also easily calculate the CAPM using the formula in the template provided.

The Expected Return can be calculated as below:

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FREE CASH FLOW TO FIRM
The free cash flow to firm (FCFF) metric is the cash available to all the firm’s creditors and
common/preferred shareholders as generated from the core operations of the business and after
accounting for expenses and long-term investments necessary to remain operating.Starting off, to
calculate free cash flow to firm (FCFF) from earnings before interest and taxes (EBIT), the first step is
to tax-affect EBIT.

EBIT is an unlevered profit measure since it is above the interest expense line and does not

include outflows specific to one capital provider group (e.g., lenders).

The tax-effected EBIT is also commonly known as:

● EBIAT → “Earnings Before Interest After Taxes”

● NOPAT → “Net Operating Profit After Taxes”

The formula to compute NOPAT, or “EBIAT,” is as follows.

NOPAT = EBIT × (1 – Tax Rate %)

Next, non-cash items such as depreciation & amortization (D&A) are added back since they

are not real cash outflows.

However, remember the rule that each item included must be recurring and part of the core

operations – thereby, not all non-cash items are added back (e.g., inventory write-downs).

Then, capital expenditures (capex) and the change in net working capital (NWC) are

deducted.

Of the outflows in the cash from investing section, the line item that should be accounted for

is capex.

The reasoning for this is that Capex is required for operations to sustain into the future,

especially maintenance capex.

The relationship between the change in NWC and free cash flow is as follows:

● Increase in Net Working Capital (NWC) → Less Free Cash Flow (FCF)

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 ● Decrease in Net Working Capital (NWC) → More Free Cash Flow (FCF)

Free Cash Flow to Firm (FCFF) = NOPAT + D&A – Change in NWC – Capex

An alternative formula to calculate FCFF starts with net income, which is a post-tax and

interest metric.

FCFF = Net Income + D&A + [Interest Expense × (1 – Tax Rate)] – Change in NWC – Capex

Lets have an example

1.

2.

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FREE CASH FLOW TO EQUITY

Free cash flow to equity is composed of net income, capital expenditures, working capital,
and debt. Net income is located on the company income statement. Capital expenditures can
be found within the cash flows from the investing section on the cash flow statement.

Working capital is also found on the cash flow statement; however, it is in the cash flows from
the operations section. In general, working capital represents the difference between the
company’s most current assets and liabilities.

Here is the example

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CREATION OF DATA TABLE
Data tables are used in Excel to display a range of outputs given a range of different inputs. They are
commonly used in financial modeling and analysis to assess a range of different possibilities for a
company, given uncertainty about what will happen in the future.

Step 1: Create a Model

The first step when creating data tables is to have a model in place. We’ve made a simple
model that includes two key assumptions: unit price and unit volume. From there, we have a
simple income statement that includes revenue, COGS, G&A, and operating profit (EBIT).

Step 2: Link the Output

Since profit is what we want to use as the output, we simply take an empty cell in the model
and link it to net income at the start of the data table (the top left corner).

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Step 3: Enter the Input Values

Once net income is linked, we need to enter the different values we want to test for unit prices
and unit volumes. To do it, we manually enter the values across the top and left sides of the
table. In this case, we will enter unit prices from $40 to $60 and volumes from 700 to 1,300.

To learn more about how to perform this type of analysis, check out CFI’s Sensitivity
Analysis Course.

Step 4: Highlight the Cells and Access the Data Tables Function

With the structure of the table complete, the next step is to highlight all the cells with data that
will be used to form the table, and then access the Excel data tables function under the Data
ribbon and What-If analysis.

The keyboard shortcut on Windows is Alt, A, W, T.

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Step 5: Link the Input Values

This can be one of the trickiest steps when setting up data tables. Financial analysts often
aren’t sure where the Row Input Cell goes and where the Column Input Cell goes. The easiest
way to think about it that the Row refers to the assumptions across the top of the table, and the
Column refers to the assumptions across the left of the table. So, link each of them to the
hard-coded assumptions that drive the model.

Step 6: Format the Data Table Output

Once the table is linked, it can be helpful to do some basic formatting so that the data table is
easier to read. This includes adding borders and labels, so users can easily see the information
contained in the analysis.

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