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Table of Contents
Cover
Title Page
Copyright
Dedication
About This Book
The Author
Part One: Introduction to Modeling
1 Modeling and Its Uses
1.1 WHAT IS A MODEL?
1.2 WHAT ARE MODELS USED FOR?
2 Principles of Model Design
2.1 INTRODUCTION
2.2 DECISION IDENTIFICATION, FRAMING, AND STRUCTURE
2.3 DECISION CRITERIA AND INFORMATION NEEDS
2.4 SENSITIVITY‐BASED DESIGN
2.5 DATA AND DATA SOURCES
2.6 MODEL MAPPING AND APPROXIMATIONS
2.7 BUILDING AND TESTING
2.8 RESULTS PRESENTATION
2.9 BIASES
Part Two: Essentials of Excel
3 Menus, Operations, Functions, and Features
3.1 INTRODUCTION
3.2 STRUCTURE AND MENUS
3.3 CALCULATIONS USING ARITHMETIC
3.4 FUNCTION BASICS
3.5 A CORE FUNCTION SET
3.6 FURTHER PROPERTIES AND USES OF FUNCTIONS
3.7 CALCULATION SETTINGS AND OPTIONS
3.8 KEYTIPS AND SHORTCUTS
3.9 ABSOLUTE AND RELATIVE REFERENCING
3.10 AUDITING AND LOGIC TRACING
3.11 NAMED RANGES
3.12 BEST PRACTICES: OVERVIEW
3.13 BEST PRACTICES: FLOW
3.14 BEST PRACTICES: TIME AXIS
3.15 BEST PRACTICES: MULTIPLE WORKSHEETS
3.16 BEST PRACTICES: FORMATTING
3.17 MODEL TESTING, CHECKING, AND ERROR MANAGEMENT
3.18 GRAPHS AND CHARTS
4 Sensitivity and Scenario Analysis
4.1 INTRODUCTION
4.2 BASIC OR MANUAL SENSITIVITY ANALYSIS
4.3 AUTOMATING SENSITIVITY ANALYSIS: AN INTRODUCTION
4.4 USING DataTables
 4.5 CHECKING THE RESULTS, LIMITATIONS, AND TIPS
4.6 CREATING FLEXIBILITY IN THE OUTPUTS THAT ARE ANALYZED
4.7 SCENARIO ANALYSIS
4.8 VARIATIONS ANALYSIS
4.9 USING GoalSeek
4.10 FURTHER TOPICS: OPTIMIZATION, RISK, UNCERTAINTY, AND SIMULATION
Part Three: General Calculations and Structures
5 Growth Calculations for Forecasting
5.1 INTRODUCTION
5.2 GROWTH MEASUREMENT AND FORECASTING
5.3 LOGIC REVERSALS
5.4 FORECASTING STRUCTURES IN PRACTICE
5.5 SIMPLIFYING THE SENSITIVITY ANALYSIS AND REDUCING THE NUMBER OF
PARAMETERS
5.6 DEALING WITH INFLATION
5.7 CONVERSIONS FOR MODEL PERIODS
5.8 FURTHER TOPICS: LOGARITHMIC AND EXPONENTIAL GROWTH
6 Modular Structures and Summary Reports
6.1 INTRODUCTION
6.2 MOTIVATION FOR SUMMARY AREAS AND THEIR PLACEMENT
6.3 EXAMPLE I: SUMMARIES AND CONDITIONAL SUMMARIES
6.4 EXAMPLE II: TARGETS, FLAGS, AND MATCHING
6.5 SENSITIVITY ANALYSIS
6.6 COMMENTS ON FORMATTING
6.7 INITIALIZATION AREAS
7 Scaling and Ratio‐driven Forecasts
7.1 INTRODUCTION
7.2 BASIC USES
7.3 LINKS TO LENGTH OF MODEL PERIODS
7.4 DAYS' EQUIVALENT APPROACHES
7.5 EXAMPLE I: FORECASTING FROM REVENUES TO EBITDA
7.6 USING RATIO‐BASED FORECASTING EFFECTIVELY
7.7 EXAMPLE II: RATIO‐BASED FORECASTING OF CAPITAL ITEMS
7.8 FURTHER TOPICS: LINKS TO GENERAL RATIO ANALYSIS
8 Corkscrews and Reverse Corkscrews
8.1 INTRODUCTION
8.2 CLASSICAL CORKSCREWS
8.3 BENEFITS AND FURTHER USES
8.4 REVERSE CORKSCREWS
9 Waterfall Allocations
9.1 INTRODUCTION
9.2 EXAMPLE I: COST SHARING
9.3 EXAMPLE II: TAX CALCULATIONS
9.4 OPTIONS FOR LAYOUT AND STRUCTURE
9.5 FURTHER TOPICS: WATERFALLS FOR SHARING CAPITAL RETURNS OR CARRIED
INTEREST
10 Interpolations and Allocations
 10.1 INTRODUCTION
10.2 EXAMPLE I: LINEAR SMOOTHING
10.3 EXAMPLE II: PROPORTIONAL SMOOTHING
10.4 USES OF TAPERING AND INTERPOLATION
10.5 TRIANGLES
10.6 FURTHER TOPICS: TRIANGLES
Part Four: Economic Foundations and Evaluation
11 Breakeven and Payback Analysis
11.1 INTRODUCTION
11.2 SINGLE‐PERIOD BREAKEVEN ANALYSIS: PRICES AND VOLUMES
11.3 BREAKEVEN TIME AND PAYBACK PERIODS
12 Interest Rates and Compounding
12.1 INTRODUCTION
12.2 STATED RATES AND CALCULATIONS WITHOUT COMPOUNDING
12.3 COMPOUNDING TYPES AND EFFECTIVE RATES
12.4 CONVERSION OF EFFECTIVE RATES FOR PERIODS OF DIFFERENT LENGTHS
12.5 AVERAGE EFFECTIVE RATES
12.6 IMPLIED RATES AND BOOTSTRAPPING
13 Loan Repayment Calculations
13.1 INTRODUCTION
13.2 EFFECTIVE RATES FOR INTEREST‐ONLY REPAYMENTS
13.3 ALIGNING MODEL PERIODS WITH INTEREST REPAYMENTS
13.4 CONSTANT REPAYMENT LOANS USING THE PMT FUNCTION
13.5 CONSTANT REPAYMENT LOANS: OTHER FUNCTIONS
13.6 PERIODS OF DIFFERENT LENGTHS
14 Discounting, Present Values, and Annuities
14.1 INTRODUCTION
14.2 THE TIME VALUE OF MONEY
14.3 CALCULATION OPTIONS FOR PRESENT VALUES
14.4 ANNUITIES AND PERPETUITIES
14.5 MULTI‐PERIOD APPROACHES AND TERMINAL VALUES
14.6 FURTHER TOPICS I: MATHEMATICS OF ANNUITIES
14.7 FURTHER TOPICS II: CASH FLOW TIMING
15 Returns and Internal Rate of Return
15.1 INTRODUCTION
15.2 SINGLE INVESTMENTS AND PAYBACKS
15.3 MULTIPLE PAYBACKS: AVERAGE RETURNS AND THE INTERNAL RATE OF
RETURN
15.4 USING ECONOMIC METRICS TO GUIDE INVESTMENT DECISIONS
15.5 PROPERTIES AND COMPARISON OF NPV AND IRR
Part V: Corporate Finance and Valuation
16 The Cost of Capital
16.1 INTRODUCTION
16.2 RETURNS, COSTS, AND OPPORTUNITY COSTS OF CAPITAL
16.3 THE ROLE OF RISK IN DETERMINING THE COST OF CAPITAL
16.4 THE PROPERTIES AND BENEFITS OF DEBT
16.5 THE FINANCING MIX AND THE WEIGHTED AVERAGE COST OF CAPITAL
 16.6 MODIGLIANI‐MILLER AND LEVERAGE ADJUSTMENTS
16.7 THE CAPITAL ASSET PRICING MODEL
16.8 FURTHER TOPICS: DERIVATION OF LEVERAGING AND DELEVERAGING
FORMULAS
17 Financial Statement Modeling
17.1 INTRODUCTION
17.2 FINANCIAL STATEMENT ESSENTIALS
17.3 KEY CHALLENGES IN BUILDING INTEGRATED FINANCIAL STATEMENT MODELS
17.4 FORECASTING OF THE INTEGRATED STATEMENTS: A SIMPLE EXAMPLE
17.5 THE DYNAMIC FINANCING ADJUSTMENT MECHANISM
17.6 GENERALIZING THE MODEL FEATURES AND CAPABILITIES
17.7 STEPS AND PRINCIPLES IN BUILDING A FINANCIAL STATEMENT MODEL
17.8 FURTHER TOPICS: AVOIDING CIRCULARITIES
18 Corporate Valuation Modeling
18.1 INTRODUCTION
18.2 OVERVIEW OF VALUATION METHODS
18.3 PRINCIPLES OF CASH FLOW VALUATION
18.4 FREE CASH FLOW FOR ENTERPRISE VALUATION
18.5 THE ROLE OF THE EXPLICIT FORECAST
18.6 EXAMPLE: EXPLICIT FORECAST WITH TERMINAL VALUE CALCULATION
18.7 FURTHER TOPICS I: ENTERPRISE VALUE BASED ON FREE CASH FLOW AND
EQUIVALENCES
18.8 FURTHER TOPICS II: VALUE‐DRIVER FORMULAS
18.9 FURTHER TOPICS III: IMPLIED COST OF EQUITY
19 Ratio Analysis
19.1 INTRODUCTION
19.2 USE AND PRINCIPLES
19.3 RATIOS FOR PROFITABILITY AND VALUATION
19.4 RATIOS RELATING TO OPERATIONS AND EFFICIENCY
19.5 RATIOS FOR LIQUIDITY AND LEVERAGE
19.6 DuPont ANALYSIS
19.7 VARIATIONS ANALYSIS WITHIN THE DuPont FRAMEWORK
19.8 FURTHER TOPICS: PORTFOLIOS AND THE PIOTROSKI F‐SCORE
Part Six: Data and Statistical Analysis
20 Statistical Analysis and Measures
20.1 INTRODUCTION
20.2 DATA STRUCTURES IN EXCEL AND THE IMPACT ON FUNCTIONALITY
20.3 AVERAGES AND SPREAD
20.4 THE AGGREGATE FUNCTION
20.5 CONDITIONAL AGGREGATIONS
20.6 DATABASE FUNCTIONS
20.7 CORRELATIONS, COVARIANCE, AND REGRESSION
20.8 EXCEL TABLES
20.9 PIVOT TABLES
20.10 FURTHER TOPICS: MORE ON AVERAGES, CORRELATIONS, AND CONFIDENCE
INTERVALS
21 Data Preparation: Sourcing, Manipulation, and Integration
 21.1 INTRODUCTION
21.2 MODELING CONSIDERATIONS
21.3 OVERVIEW OF DATA MANIPULATION PROCESS
21.4 CLEANING EXCEL DATA SETS
21.5 INTEGRATION OF EXCEL DATA SETS
21.6 FURTHER TOPICS I: INTRODUCTION TO PowerQuery – APPENDING TABLES
21.7 FURTHER TOPICS II: INTRODUCTION TO PowerQuery – DATA MANIPULATION
21.8 FURTHER TOPICS III: INTRODUCTION TO PowerPivot AND THE DATA MODEL
Index
End User License Agreement

List of Illustrations
Chapter 1
Figure 1.1 Influence Diagram of a Simple Revenue Model
Figure 1.2 Excel Model That Contains Formulas but No Values
Figure 1.3 Excel Model with Input Cells Populated with Values
Figure 1.4 Input Cells with Color‐Coding
Figure 1.5 Using a Model to Compare Sales Revenues for Business Design Optio...
Chapter 2
Figure 2.1 Basic “Go/No Go” Decision with Sub‐Options
Figure 2.2 Using the Decision to Design the Model That Supports the Decision
Figure 2.3 Using a Sensitivity‐Based Thought Process to Define Model Variabl...
Chapter 3
Figure 3.1 Core Menu Tabs
Figure 3.2 The Home Tab (left‐hand‐side only)
Figure 3.3 The Formulas Tab (left‐hand‐side only)
Figure 3.4 Example of the SUM Function
Figure 3.5 The Insert Function Menu
Figure 3.6 The IF Function and Its Arguments
Figure 3.7 Entering the UNIQUE Function in a Single Cell
Figure 3.8 The Dynamic Output Range of the UNIQUE Function
Figure 3.9 Using # To Refer to a Dynamic Output Range
Figure 3.10 The Calculation Options on the Formulas Tab
Figure 3.11 Effect of Changes to Input Values in Manual Setting
Figure 3.12 Accessing the Menu Using KeyTips
Figure 3.13 Selecting a Range to be Copied
Figure 3.14 Results After Pasting
Figure 3.15 The Adjusted and Completed Model
Figure 3.16 The Paste Special Menu
Figure 3.17 Central Costs Allocated According to Trips
Figure 3.18 Formulas Used to Allocate Central Cost
Figure 3.19 The Formulas/Formula Auditing Menu
Figure 3.20 The Formula View
 Figure 3.21 Using Trace Dependents and Trace Precedents
Figure 3.22 Inspecting a Formula Using the F2 Key
Figure 3.23 The Watch Window
Figure 3.24 Using the Name Manager
Figure 3.25 Simple Model with Named Inputs
Figure 3.26 The Name Box
Figure 3.27 Accessing the Go To (F5) Functionality
Figure 3.28 Diagonal Dependency Paths
Figure 3.29 Horizontal and Vertical Dependency Paths
Chapter 4
Figure 4.1 Accessing a DataTable Using Data/What‐If Analysis
Figure 4.2 Recap of Cab (Taxi) Business Profit Model
Figure 4.3 Three Raw DataTable Structures
Figure 4.4 Completing a Two‐Way DataTable
Figure 4.5 The Completed Two‐Way DataTable
Figure 4.6 The Raw DataTable Structures for DataTables with Multiple Outputs
Figure 4.7 Summary Area with Selection Menu
Figure 4.8 DataTable with Choice of Outputs to Analyze
Figure 4.9 Using Data Validation to Restrict a User's Choices to Valid Items...
Figure 4.10 Model Inputs Are Replaced by Cell References to the Scenario Cho...
Figure 4.11 Implementing the Scenario Results Using a DataTable
Figure 4.12 Simple Example of Variance Analysis
Figure 4.13 Example of Using GoalSeek
Chapter 5
Figure 5.1 Basic Growth Forecast
Figure 5.2 Historical Information and Growth Forecasting
Figure 5.3 Common Layout of Growth Forecasting
Figure 5.4 Multi‐period Forecast Using the Common Layout
Figure 5.5 Reducing the Number of Separate Input Assumptions
Figure 5.6 Full Separation of Inputs from Calculations
Figure 5.7 DataTable of Year 5 Revenues to Two Growth Assumptions
Figure 5.8 Using Inflation as a Separate Item
Figure 5.9 Comparison of Measurement and Forecasting Results
Figure 5.10 Raw Data on Growth Rates Measured by Each Method
Figure 5.11 Calculation of Total and Average Growth Using Each Method
Chapter 6
Figure 6.1 An Initial Five‐Year Model with Quarterly Periods
Figure 6.2 Summary of Five‐Year and Specified Year
Figure 6.3 Using Flag Fields to Find When a Target is Met
Figure 6.4 Using a DataTable for Items in the Summary Report
Figure 6.5 Setting a Conditional Format Rule
 Figure 6.6 Dependencies without Initialization Area
Figure 6.7 Use of an Initialization Area to Be Able to Have Consistent Formu...
Chapter 7
Figure 7.1 Historical Calibration and Ratio‐Based Forecast for a Flow Item...
Figure 7.2 Historical Calibration and Ratio‐Based Forecast for a Stock Item...
Figure 7.3 Using the Days, Equivalent Method
Figure 7.4 Price Forecast for the Example Model
Figure 7.5 Sales Revenue Calculation
Figure 7.6 Calculation of Fixed and Variable Costs
Figure 7.7 Calculation of EBITDA in the Simple Model
Figure 7.8 Calculation of CapEx Using a Volume‐Based Ratio and Inflation...
Chapter 8
Figure 8.1 Framework for a Corkscrew Structure
Figure 8.2 Linking of CapEx into the Corkscrew Structure
Figure 8.3 Linking of CapEx into the Corkscrew Structure
Figure 8.4 Completion of Structure for the First Period
Figure 8.5 Completed Structure with Dependency Paths Shown
Figure 8.6 Basic Ratio Analysis of Assets to Sales
Figure 8.7 Calculation of Net Flow Items
Figure 8.8 Core Structure of a Reverse Corkscrew
Figure 8.9 Inclusion of One Flow Item
Figure 8.10 Completion of Both Flow Items
Chapter 9
Figure 9.1 General Split Using the MIN Function
Figure 9.2 Two Category Waterfall Split – Vertical Layout
Figure 9.3 Two Category Waterfall Split – Horizontal Layout
Figure 9.4 Capacities of the Multiple Layers
Figure 9.5 Completed Calculations of Multiple Layer Example
Figure 9.6 Waterfall Structure for Tax Calculation
Figure 9.7 Vertical Waterfall Structured by Item
Figure 9.8 Time Axis on a Vertical Waterfall Structured by Item
Figure 9.9 Vertical Waterfall Structured by Band
Figure 9.10 Capital Return Waterfall with Single Threshold
Figure 9.11 Capital Return Waterfall with Alternative Value
Figure 9.12 Capital Return Waterfall with Alternative Value
Chapter 10
Figure 10.1 Overview of Model with Interpolated Growth Rates
Figure 10.2 The Formula Used in Cell H11
Figure 10.3 Proportional Smoothing with Flexible Period Start
Figure 10.4 Logic Flow for Each Forecast Formula
Figure 10.5 Formula Used in Cell H8
 Figure 10.6 Example of the Effect of a Combined Smoothing
Figure 10.7 Triangle Inputs: Time‐Specific Purchases and Generic Time Alloca...
Figure 10.8 Time‐Specific Allocations (Step 1)
Figure 10.9 Time‐Specific Allocations (Step 2)
Figure 10.10 Triangle Outputs Feeding a Corkscrew
Chapter 11
Figure 11.1 Model Used for Single‐Period Analysis
Figure 11.2 Cost Structure as Volume is Varied
Figure 11.3 Revenue, Cost, and Profit as Volume is Varied
Figure 11.4 Thresholds and Combinations to Achieve Breakeven
Figure 11.5 Time‐Based Forecast from Sales to EBITDA
Figure 11.6 Completed Model with Forecast to Cash Flows
Figure 11.7 Completed Set of Calculations
Figure 11.8 The Formula View of the Completed Calculations
Chapter 12
Figure 12.1 Example of Compounded Interest Calculations
Figure 12.2 Example of the EFFECT Function
Figure 12.3 Effective Periodic Rates for Different Compounding Frequencies
Figure 12.4 Use of FVSCHEDULE Function
Figure 12.5 Yield Curve Bootstrapping Assumptions and Context
Figure 12.6 Yield Curve Bootstrapping Results
Chapter 13
Figure 13.1 Use of the Derived Formula to Calculate an Effective Rate Given ...
Figure 13.2 Explicit Calculation of the Effective Rate Given Repayments
Figure 13.3 Example of the PMT Function
Figure 13.4 Function Arguments for the PMT Function
Figure 13.5 Explicit Calculation of Loan Repayment Using a Corkscrew Structu...
Figure 13.6 Payment Value with Start‐of‐Period Payments
Figure 13.7 Explicit Calculation When Payment Is at the Start of Each Period
Figure 13.8 Reversal of Natural Values when Using PMT
Figure 13.9 Verification of Calculations Using Sign Reversal
Figure 13.10 Examples of the RATE, NPER, FV, and PV Functions
Figure 13.11 Rates When the Loan Period Is a Multiple of the Compounding Per...
Chapter 14
Figure 14.1 The Assumed Cash Flow Profile for a Discounting Example
Figure 14.2 The Assumed One‐Year Discount Rates
Figure 14.3 Possibilities to Calculate the Discount Factors
Figure 14.4 The Discounted Cash Flows and the Total
Figure 14.5 Constant Discount Rate with Explicit Profile
Figure 14.6 Use of the NPV Function
Figure 14.7 Valuing an Annuity by Explicit Calculation of the Cash Flows
 Figure 14.8 Application of the Annuity Formulas
Figure 14.9 Input Assumptions for Two‐Stage Terminal Value Calculation
Figure 14.10 Implementation of Two‐Stage Terminal Value Calculation
Chapter 15
Figure 15.1 Percentage Returns Calculated Explicitly in a Simple Case
Figure 15.2 Returns Expressed on a Per‐Period Basis
Figure 15.3 Example with Payback Occurring in Two Periods
Figure 15.4 Inflating or Discounting Cash Flows to Achieve a Total Value of ...
Figure 15.5 Using the IRR Function
Figure 15.6 IRR with Several Periods of Investment and Payback
Chapter 16
Figure 16.1 Threshold Level for Debt‐Equity Substitution and without Taxes...
Figure 16.2 Threshold Level for Debt‐Equity Substitution and without Taxes...
Figure 16.3 The Leverage Effect of Debt on Returns to Equity (at Book Value)
Figure 16.4 Effect of Debt with Taxes
Figure 16.5 Effect of Debt If Charges Were Not Offset Against Taxes
Figure 16.6 Generic Effect of Leverage on Cost of Capital: Equity, Debt, and...
Figure 16.7 A Simple Example of the Calculation of the Expected Return
Chapter 17
Figure 17.1 Income Statement for Simple Model
Figure 17.2 Cash and Equity Corkscrews
Figure 17.3 The Balance Sheet for the Base Case
Figure 17.4 The Balance Sheet with a Lower Initial Capital Injection
Figure 17.5 Implementation of the Adjustment Mechanism
Figure 17.6 Completion of Statements to Reflect the Equity Injection
Figure 17.7 Example of Adding an Accounts Receivable Functionality
Chapter 18
Figure 18.1 Forecast to the NOPAT line
Figure 18.2 Calculation of the Value in the Explicit Forecast Period
Figure 18.3 Terminal Value Calculation
Figure 18.4 Total Enterprise and Equity Value
Chapter 19
Figure 19.1 Generic Example of DuPont Analysis Using Linear Scales
Figure 19.2 Variations Analysis Using Component Parts
Chapter 20
Figure 20.1 Raw Data for Input to the Statistical Functions
Figure 20.2 Examples of the Use of AGGREGATE
Figure 20.3 Using AGGREGATE with its Fourth Argument
Figure 20.4 Augmented Data Set with Month and Year Information
Figure 20.5 Use of the AVERAGEIFS Function
Figure 20.6 Data Set with Field Headers
 Figure 20.7 Example of a Criteria Range for a Database Function
Figure 20.8 Function Arguments for the Database Functions
Figure 20.9 Results of Applying the Database Functions
Figure 20.10 Data Set for Correlation and Regression Analysis
Figure 20.11 X‐Y Scatter Plot with Trendline Displayed
Figure 20.12 Calculation of Slope, Correlations, and Standard Deviations
Figure 20.13 Creating a Table
Figure 20.14 The Table Design Tab
Figure 20.15 Entering a Formula That Will Refer to a Table
Figure 20.16 Completed PivotTable with a Row Structure
Figure 20.17 First Step to Insert a PivotTable
Figure 20.18 Completion of Step‐by‐Step Creation of a PivotTable
Figure 20.19 Population of the PivotTable Structure
Figure 20.20 Results of the LINEST Function
Chapter 21
Figure 21.1 Raw Data and Desired Transformation
Figure 21.2 Calculation Steps for One Item, Shown in a Column
Figure 21.3 Row Form of the Calculations and Results
Figure 21.4 Data Including Transaction Values in Local Currency
Figure 21.5 Tables with Additional Information That Need to Be Referenced
Figure 21.6 Augmented Main Table Showing Country Names
Figure 21.7 Main Table with Further Augmentation
Figure 21.8 The Completed Flat Table
Figure 21.9 Results of Appending Two Tables to Create a Third
Figure 21.10 The PowerQuery Editor
Figure 21.11 Selecting to Create a Connection Only
Figure 21.12 Queries & Connections Before Appending
Figure 21.13 Using the Table.Combine Operation
Figure 21.14 Using PowerQuery for the Full Process
Figure 21.15 Tables and Their Relationships within the Data Model
Figure 21.16 Creation of a Measure
Figure 21.17 PivotTable that Displays the Value of a PowerPivot Measure
THE ESSENTIALS OF FINANCIAL MODELING IN EXCEL
A CONCISE GUIDE TO CONCEPTS AND METHODS

Michael Rees
This edition first published 2023
© 2023 Michael Rees
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Library of Congress Cataloging‐in‐Publication Data
Names: Rees, Michael, 1964‐ author.
Title: The essentials of financial modeling in Excel: a concise guide to concepts and methods / Michael Rees.
Description: Hoboken, NJ: John Wiley & Sons, Inc., 2023. | Includes index.
Identifiers: LCCN 2022043302 (print) | LCCN 2022043303 (ebook) | ISBN 9781394157785 (paperback) | ISBN
9781394157792 (adobe pdf) | ISBN 9781394157808 (epub)
Subjects: LCSH: Finance—Mathematical models. | Corporations—Finance—Mathematical models. | Microsoft
Excel (Computer file)
Classification: LCC HG106. R439 2023 (print) | LCC HG106 (ebook) | DDC 332.0285/554—dc23/eng/20220908
LC record available at https://lccn.loc.gov/2022043302
LC ebook record available at https://lccn.loc.gov/2022043303
Cover Design: Wiley
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This book is dedicated to Elsa and Raphael.
About This Book

This book provides a concise introduction to financial modeling in Excel. It aims to provide readers with a well‐
structured and practical tool kit to learn modeling “from the ground up.” It is unique in that it focuses on the
concepts and structures that are commonly required within Excel models, rather than on Excel per se.
The book is structured into six parts (containing twenty‐one chapters in total):
Part I introduces financial modeling and the general factors to consider when designing, building, and using
models.
Part II discusses the core features of Excel that are needed to build and use models. It covers operations and
functionality, calculations and functions, and sensitivity and scenario analysis.
Part III covers the fundamental structures and calculations that are very frequently used in modeling. This
includes growth‐based forecasting, ratio‐driven calculations, corkscrew structures, waterfalls, allocations,
triangles, and variations of these.
Part IV discusses economic modeling, measurement, and evaluation. It covers the analysis of investments,
interest calculations and compounding, loan calculations, returns analysis, discounting, and present values.
Part V treats the core applications of modeling within corporate finance. It covers the cost of capital, the
modeling of financial statements, cash flow valuation, and ratio analysis.
Part VI covers statistical analysis, as well as data preparation, manipulation, and integration.
Readers will generally obtain the maximum benefit by studying the text from the beginning and working through
it in order. It is intended that the reader builds from scratch the models that are shown, to reinforce the learning
experience and to enhance practical skills. Of course, there may be areas which are already familiar to some
readers, and which can be skim‐read. Nevertheless, the text is intended to be concise and practical, and to contain
information that is potentially useful even to readers who may have some familiarity with the subject.
Although the text is focused on the essentials, at various places it briefly highlights some aspects of more
advanced topics. These are described in Further Topics sections, which are situated at the end of some chapters.
These sections can be skipped at the reader's discretion without affecting the comprehension of the subsequent
text. Note that another of the author's works (Principles of Financial Modelling: Model Design and Best Practices
Using Excel and VBA, John Wiley & Sons, 2018) discusses in detail some topics that are only briefly (or not)
covered in this text (notably VBA macros, optimization, circularities, named ranges, and others). For convenience,
in the current text this other text is occasionally mentioned at specific places where it contains significant
additional materials related to the discussion, and is subsequently referred to as PFM.
The Author

Dr. Michael Rees is a leading expert in quantitative modeling and analysis for applications in business economics,
finance, valuation, and risk assessment. He is Professor of Finance at Audencia Business School in Nantes
(France), where he teaches subjects related to valuation, financial engineering, optimization, risk assessment,
modeling, and business strategy. His earlier academic credentials include a Doctorate in Mathematical Modelling
and Numerical Algorithms, and a BA with First Class Honours in Mathematics, both from Oxford University in
the UK. He has an MBA with Distinction from INSEAD in France. He also studied for the Certificate of
Quantitative Finance, graduating top of the class for course work, and receiving the Wilmott Award for the highest
final exam mark. Prior to his academic career, he gained over 30 years' practical experience, including in senior
roles at leading firms in finance and strategy consulting (JP Morgan, Mercer Management Consulting, and Braxton
Associates), as well as working as an independent consultant and trainer. His clients included companies and
entrepreneurs in private equity; auditing and consulting; finance; banking and insurance; pharmaceuticals and
biotechnology; oil, gas, and resources; construction; chemicals; engineering; telecommunications; transportation;
the public sector; software; and training providers. In addition to this text, he is the author of Principles of
Financial Modelling: Model Design and Best Practices Using Excel and VBA (2018); Business Risk and
Simulation Modelling in Practice: Using Excel, VBA and @RISK (2015); and Financial Modelling in Practice: A
Concise Guide for Intermediate and Advanced Level (2008).
Part One
Introduction to Modeling
1
Modeling and Its Uses

1.1 WHAT IS A MODEL?

A financial model is a representation of a real‐life situation in business, economics, or finance. That is, it identifies
the items that represent the core properties of the situation and expresses the relationships between these. For
example, there is a relationship between the price per unit, the volume sold, and the sales revenue of a business.
This can be captured visually in an influence diagram (Figure 1.1).
From a pure theoretical perspective, the relationship can be defined more precisely using a formula:

(Where V is the volume sold, P is the average price achieved per unit, and S is the sales revenue.)
It is worth noting that the arrows in Figure 1.1 indicate the directionality of the logic. (For convenience, such
diagrams would use the “natural” left‐to‐right flow wherever possible.) On the other hand, in the formula, the logic
is “right‐to‐left”: In the context of numerical computations (and modeling), the = sign is used to mean that the item
on the left (called the output) is calculated from those on the right (called the inputs). In other words, although
from a purely mathematical perspective the left‐ and right‐sides of the formula could be reversed, this would not
be possible from the perspective of modeling, where formulas act not only as a statement of mathematical equality,
but also of directionality.

Figure 1.1 Influence Diagram of a Simple Revenue Model

An Excel worksheet can be used to represent the situation in a very similar way (i.e. to capture only the
relationships). For example, Figure 1.2 shows the formula (in cell C4) that calculates Sales Revenue by
multiplying the value of the Price per Unit (cell C2) with that of the Volume in Units (cell C3), even as the input
cells (i.e. C2 and C3) are currently blank.
Figure 1.2 Excel Model That Contains Formulas but No Values
In Excel, the * symbol is used for multiplication, so that the formula can be thought of as:

The presentation of the value of cell C4 reinforces that C2 and C3 are the inputs (on the right), with C4 being the
output (on the left).
Of course, if one were interested in representing the relationships from a theoretical perspective only, then Excel
would be a relatively ineffective way to do so (i.e. one would be better using mathematical formulas directly in a
text document). In practical applications, a worksheet (model) will be populated with actual input values, which
are relevant for the specific situation under consideration. For example, Figure 1.3 shows the same model but
where the input cells (C2 and C3) contain specific values, so that cell C4 calculates the Sales Revenue that
corresponds to that situation.
The input values can be entered or altered by the modeler (or by another user of the model). For this reason, when
working in Excel, it is good practice to make a clear distinction between inputs and calculations (formulas), so that
a user knows which items can be changed (and which should not be). Figure 1.4 shows an example of using the
shading of a cell to make such a distinction (while perhaps less clear in the black and white image, in addition to
the background shading, the font of such a cell can be a different color to that of the font used of a calculated cell,
in order to increase the distinction further).

Figure 1.3 Excel Model with Input Cells Populated with Values
Figure 1.4 Input Cells with Color‐Coding
Note that in mathematical formulas, each item (such as P, V, or S) represents both the name and the value of that
variable. However, in Excel, by default a formula is “stand‐alone,” and is created directly with reference to the
values of the items. That is, a formula is given meaning (or context) by the labels that are used in other cells. For
example, in Figure 1.4, cell C2 contains a value (10), but we know that this represents the price because of the
label that is entered in cell B2. Similarly, we know that the value in C3 represents the volume by reference to the
label in B3. Similarly, the label in B4 for the sales revenue is an appropriate label for the value in C4 simply
because the value is calculated by multiplying price with volume (rather than, say, adding them). In fact, in Excel,
it is possible to combine these roles (i.e. of the label and the value) by naming the cells (such as naming cell C2
“Price,” cell C3 “Volume” and C4 “Sales Revenue”). This is discussed in Chapter 3 in more detail.
Of course, the input values should be appropriate for the situation that is being addressed. Further – as an entry
into a cell of Excel – each input value is a single number (in principle). The output is also a single number that is
calculated from the inputs. The terms “base case” or “central case” are often used to refer to this single core
“reference” case, which in principle should represent a realistic scenario for the values that may arise (other
scenarios can be defined and stored in the model, such as optimistic or pessimistic cases; see Chapter 4).
In fact, very often, the value used for an input is simply a best estimate or a judgment, or a figure that is derived
from a comparable situation, or from analyzing historical data. Therefore, there may be some uncertainty as to the
true value. Similarly, some inputs may represent items over which a decision‐maker has some control in real‐life
and therefore relate to a decision or choice (rather than being uncertain). These situations can be captured by using
various values for the input assumptions to create scenarios, meaning also that there will be a range in values for
the output. In fact, the creation and analysis of the possible range of outcomes is an important part of using
modeling in decision support. The methods to do so range from the simplest (e.g. copying the model several times,
using different input values for each), to specific sensitivity‐analysis functionality within Excel (covered in
Chapter 4), as well as to more advanced approaches, including risk analysis, simulation, and optimization analysis
(which are mentioned in the Further Topics Sections in Chapter 4 and Chapter 20).

1.2 WHAT ARE MODELS USED FOR?

Models can be used to try to gain a better understanding of (or insight about) a real‐life situation, with the aim of
making a more informed decision in relation to it. For example, one may be deciding whether to launch a business
or not. Within the overall decision, there may be several sub‐options:
A mid‐market “base” business design (reasonable prices and volumes)
A “premium” focus (higher prices but achieving lower volumes)
A “mass‐market” approach (lower prices and achieving higher volumes)
Another random document with
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 THE CHEERY FRENCH
PILOT, LIEUT. MEJECK CHIEF QUARTERMASTER
BENTON

The badly damaged Corsair required a long and costly overhauling

to make her ready and fit for service, and this work was undertaken,
and well done, by the organization of the Portuguese naval docks
and arsenal. With a most admirable spirit of friendship and
coöperation between two allies in the struggle against a mutual
enemy, the Government of Portugal refused to accept any payment
whatever, although every effort was made to obtain a bill for services
rendered. Commander Kittinger explains this handsome incident in
the following report:
The U.S.S. Corsair arrived at Lisbon, Portugal, on
December 19, 1917, in need of repairs to make her
seaworthy. The matter was taken up with the Portuguese
naval authorities by the American Consul-General and the
Commanding Officer. An engineer and a naval constructor
were immediately sent off to the ship from the Naval
Arsenal to estimate and report. The same day the Director
of the Arsenal stated that he could and would do the work,
and that the ship would be berthed at the Arsenal on the
following day.
As promised, the Arsenal workmen came on board and
started the work, and in the afternoon the ship was
moored to the Arsenal dock. An estimate of time and cost
was requested. The time was estimated at from one
month to six weeks, but the cost estimate could not be
given. It was suggested that the cost be made actual for
labor and material, plus a reasonable overhead. To this
the Director replied that the Minister of Marine had
ordered the work done free of charge to the U.S.
Government, stating that repairs had been done to British
and French Government vessels gratis.
The work proceeded rapidly and efficiently. I made
periodical calls at the office of the Chief Engineer and
Naval Constructor to obtain a cost estimate. This was
promised for my information, but never received. Finally I
was told that if the Consul-General would write a letter on
the subject to the Minister of Marine, the estimate would
be given and a basis of payment arranged, but that the
money would be turned over to the Red Cross.
The reply to the Consul-General’s letter is herewith
attached, the substance of which is a refusal on the part of
the Portuguese Government to accept payment.
I requested the Consul-General to keep at the business
of trying to obtain a basis of settlement. Later on, I was
informed through the Consulate that the Provisional
President, to whom the Minister of Marine had referred the
matter, had decided to accept payment. This was the
status of the question until January 25th, the day before
the Corsair’s departure, when the Commanding Officer,
 accompanied by the Consul-General, made leave-taking
calls upon the Arsenal officials.
The Director of the Arsenal at this time stated that he
had orders from the President to render no bill to the U.S.
Government. As our Government had not recognized the
officials in power in Portugal during this time, the American
Minister could take no action.
The cost of repairs to the U.S.S. Corsair by the
Portuguese Government during the period from December
20th to January 25th is a gift to the U.S. Government.
A translation of the letter in which the naval authorities of Lisbon,
with the most courteous obstinacy, decline to permit the Corsair to
pay for the valuable services received, reads as follows:
Office of the Minister of Marine
Administration of Repairs and
Equipment, Naval Arsenal

I have the honor to accept the receipt of your

communication dated the second instant and to transcribe
the decree of the fourth instant by His Excellency, the
Minister of Marine, concerning the matter, viz:
The Minister of Marine, appreciating the spirit
of the note, No. 830, and taking into
consideration the fact that the damages were
suffered in the service of the Allied Cause which
we jointly defend, and desiring to have the
approval of His Excellency, the Consul-General,
and therefore of the Government which he
represents, has decided that payment cannot be
accepted for the repairs made.
It is our pleasure and privilege to give all that is
within our power, and we pledge our word to
coöperate with our most earnest efforts for the
cause of humanity and justice.
(Signed) Pelo, Director
To His Excellency “To our Welfare and
Fraternity”
The Consul-General of the
United States of America
 CHAPTER IX
UNCLE SAM’S BRIDGE OF SHIPS

When the Corsair again meets a blow,

The crew they will surely all know,
Tho’ the distance be great,
They’ll work early and late
To make the good port of Lisboa.

It’s hither and thither and there,

But divil a bit do we scare,
For the captain and crew
Will see the thing through
In the dear little gray Corsair.

The Fo’castle Glee Club

R EADY again to tussle with the wintry seas offshore, the Corsair
sailed from Lisbon on January 26, 1918, and returned to her
base at Brest at the usual cruising speed of fourteen knots. There
were many pleasant memories of the smiling, gracious city on the
Tagus, and a few broken hearts which were soon mended among
the Yankee mariners who had sterner business and were anxious to
get on with the war. They found a greatly increased activity at Brest,
where the largest transports were pouring the troops ashore in
swelling volume and thousands of negro stevedores emptied the
holds of supplies which overflowed the wharves and the
warehouses. The bold prediction of an American bridge of ships
across the Atlantic was rapidly becoming a reality and the German
confidence in ruthless submarine warfare was an empty boast,
thanks to the skill and courage of the Allied naval forces.
 In one of the American yachts, as a seaman, was Joseph
Husband, a trained writer who portrayed the swift expansion of
activity in such words as these:[4]
The flag has come into its own again. In the bright
sunshine almost a hundred ships swing slowly at their
anchor chains, a vast floating island of steel hulls, forested
with slim, sparless masts and faintly smoking stacks. Our
anchor is lifted and the chain rumbles up through the
hawse-pipe. Slowly we steam past a wide mile of vessels
to our position.
Here are the flags of the nations of the world, but by far
the most numerous are the Stars and Stripes. The red flag
of the English merchantman is much in evidence, and so
are the crosses of Denmark, Sweden, and Norway, and
the Tri-Color of France. From a big freighter flies the single
star of Cuba. The red sun of Japan and the green and
yellow ensign of Brazil snap smartly in the breeze. A few
of the freighters are painted a leaden gray, but for the
most part they are gay with camouflage. The spattered
effects of the earlier days are now replaced by broad
bands of flat colors. Black, white, blue, and gray are the
favorites, slanting to the bow or stern and carried across
life-rafts, boats, superstructures, and funnels. Some
appear to be sinking by the head, others at a distance
seem to be several vessels. It is a fancy dress carnival, a
kaleidoscope of color. One and all they are of heavy and
ugly lines. On forward and after decks the masts seem
designed only to lift the cargo booms and spread the
wireless. The oil-burners are even more unshiplike, for a
single small funnel is substituted for the balanced stacks
of coal-burning steamers.
Fore and aft on the gun-decks the long tubes of the
guns point out over bow and stern. Yankee gun crews,
baggy blue trousers slapping in the breeze, stand beside
them and watch us pass. Blue-clad officers peer down at
us from the bridges. Aloft, hoists of gay signal flags, red,
yellow, white, and blue, flutter like confetti in the air. From
signal bridges bluejackets are sending semaphore signals
with red and yellow flags. A big American ocean-going tug
churns through the fleet. On our right is a French mine-
layer, long rows of mines along her deck. Fast motor-
boats slide in and out among the vessels. Above, like
dragonflies, three seaplanes soar.
The outward-bound convoy of empty freighters is ready.
Bursts of steam from bows indicate that anchor engines
are lifting the big mud-hooks from the harbor’s floor. One
by one the ships steam slowly out of port; converted
yachts and small French destroyers on either side. Out
where the entrance broadens to the open sea, a big kite
balloon tugs at the small steamer far beneath it and
seems to drag it by a slender cord of steel.
 THE HOME OF THE AMERICAN NAVAL OFFICERS’
CLUB IN BREST

Instead of a few American naval officers ashore in Brest, there

were scores of them from transports, supply ships, and the escort
divisions. Their social headquarters, which had become almost
indispensable, was the spacious building of the American Naval
Officers’ Club on the Place du Château, conveniently near the water-
front. The club had been organized in September, 1917, by a group
of naval officers among whom Lieutenant Robert E. Tod, of the
Corsair, was the most active in promoting its interests and making it
successful. Captain Fletcher, later a rear admiral, was the first
president and was succeeded by Admiral Wilson when he arrived in
November. Lieutenant Milton Andrews served as secretary, and a
board of directors administered the affairs of the club whose
membership was strictly naval.
The comfortable French mansion was well furnished and
equipped, with a restaurant, reading-room, billiard-room, and
bedrooms, and during 1918 there were more than six hundred
members who enjoyed this haven when they came in weary of the
sea. The name was changed to the Naval Officers’ Mess, as more
appropriate. The club-house had been purchased by Lieutenant Tod
personally, in order to facilitate matters, and when the war was over
and the naval fleet was homeward bound, he presented the building
to the French Government as a permanent club for the officers of the
Allied naval services. All members of the Naval Officers’ Mess were
to retain their connection in this new organization which is called
“The Cercle Naval.”
Here the officers of the Corsair foregathered when they returned
from Lisbon, to catch up with the gossip of their trade. They found
the club filled with new members and visitors, the Regular Navy
enjoying reunions and swapping yarns of bygone cruises on the
China station or in the Mediterranean, or of service in the Spanish
War when these sedate captains and rear admirals had been flighty
youngsters or consequential two-stripers. The captain of a huge
transport fetching in ten thousand doughboys sat in a corner with the
skipper of a little “fish boat” from Gloucester which was trawling for
German mines in the channels of the Gironde or the Loire. The
officers of the Reserve Force met college chums or formed new
friendships and compared notes on the ways and means of
scuppering Fritz.
Admiral Wilson had perceived that with more escort vessels at his
command and an increasing force promised, he could gain efficiency
by distributing his ships at several bases along the French coast,
from Brest to Bordeaux, under district commanders. This would
enable him to give better protection and to move the convoys more
rapidly as they went in and out of the other ports of American entry.
In accordance with this plan, the Corsair was detached from the
Brest force and ordered to make her headquarters on the river
Gironde below Bordeaux. The area was in the patrol district of
Rochefort which was in charge of Captain Newton A. McCully,
U.S.N., who was later made a rear admiral. The Corsair found it
highly satisfactory to operate under this capable and energetic officer
who made two cruises in the yacht, in March, when she went out to
meet laden troop convoys and escorted them in to France. The
coöperating French naval force was directed from the station ship
Marthe Solange which was anchored at Verdon on the Gironde.
After coaling ship at Brest, the Corsair started for her new base on
January 31st, escorting several supply ships which were bound for
Bordeaux and loaded with aeroplane equipment and munitions. How
rumor flew about and was eagerly, solemnly discussed is indicated in
these bits from a sailor’s diary:
January 31st. Hauled out of Brest with our convoy at
three in the morning, proceeding at nine knots. At
Quiberon we picked up the rest of them and headed for
Bordeaux, the destroyers Warrington and Monaghan with
us. I understand that we are not to go all the way up to
Bordeaux, but will base at our own Navy aviation camp
some thirty miles down the river. Hear they will work us to
death. Hope we will have a chance to run up and see the
city.
 February 1st. Steamed up the river and stopped at
aviation camp at Pauillac. Incidentally there are a
thousand sailors here and not one flying machine. About
five hundred Austrian prisoners and six hundred Germans
are helping build the camp. Got Bordeaux liberty and
arrived there after dark. The city is under military law and
there are all sorts of fussy Army rules and regulations. We
went to fourteen hotels before we found a place to sleep.
We couldn’t see the town, as it was in darkness.
Everybody has to be off the streets at 10.30 p.m. The only
criticism I have to make of the town is that there are
altogether too many soldiers in it.
February 4th. Got another liberty to-day. Heard some
big news. The America, on her way over here and loaded
with troops, was torpedoed. She was not seriously
damaged and by dropping depth mines brought the
German submarine to the surface. The officers and crew
were captured alive and have been carried into Brest,
along with the submarine. Also, a few days ago a U-boat
came up and surrendered to the Dixie, the crew having
killed the captain. The submarine was absolutely out of
provisions and supplies and the men were in bad shape.
This is a fine omen. (Note:—I later discovered that these
stories are untrue.)
February 6th. More big news. A German submarine
came into Brest harbor flying a white flag, and
surrendered. We have her at a mooring buoy all intact and
fit for sea. They had run out of fuel oil and grub and were
fed up with the service. There wasn’t a chance of getting
back to Germany with the boat, so she sensibly gave
herself up. I hope they are all in the same rotten bad
shape. (Note:—This story of the submarine surrendering
at Brest is found to be all bunk.)
The yachts Wakiva and May now joined the Corsair for escort duty
and the Aphrodite and Nokomis were added to the division force a
little later. In addition to the orders received from the American
commander of the naval district, the most explicit instructions came
from the French senior officer of the “Division des Patrouille de
Gascogne.” With the courtesy to be expected of him, he sent also a
translation in order to save trouble for his comrades of the American
Navy. At times the English phrasing had a Gallic twist, not enough to
perplex the Corsair whose officers had become adepts at the French
nautical lingo, but the effect was a trifle confusing to the eye of a
layman, as for instance:
Signals between convoy and escort are to be done by
the besides code. Do signals only if necessary. The last
ship in each line don’t show any stern lights be ready to
show navigation lights if necessary.
Zigzags are to be done according to the orders of the
escort’s do (see diagramms besides). All the ships show
the flag K. Manœuvring is to be executed only when the K
is getting down all the ships do K, is to be taken like the
origin of the diagramm, which is to be sailed by the
beginning. Manœuvre when the signal gets down or when
the least stations according to the regular numerotage.
By fog, and on order of the escort if necessary by WT,
each column will steer like a special line each behind the
escort ships on the same side. The right line will then
steer ten degrees right hand and the left line five degrees
left hand from the primitive curse of the convoy.
Escort and convoy ships are ordered not to bring
anything overboard. Burn all you can and if impossible to
burn, bring overboard rubbish altogether at once in the
beginning of night. All the rubbish spread over the sea are
precious indice for the submarine to know the curse of the
convoy.
During the rest of the winter and through the spring of 1918, the
Corsair was with the convoys and continued to base in the Gironde.
The work seemed humdrum and monotonous to the crews, who
pined for excitement and encounters, but this very fact was proof
that the Navy was achieving the result expected of it, which was to
keep the road open to France. Submarines ran amuck now and then
and strafed a coastwise convoy of slow ships or sank an empty
transport homeward bound, but never for a moment was the
prodigious movement of troops and material interfered with or
delayed. Grouping the steamers together and screening them with
escort vessels, as far as possible, had baffled the high hopes of Von
Tirpitz and his murderous gang.
The captains of these ships which moved deep-laden through the
war zone were learning the tricks of the trade and intelligently
adapting themselves to the exactions of the convoy system. Admiral
Sims said of them:
The advantages of the convoy were so apparent to me
that, despite the pessimistic attitude of the merchant
captains, there were a number of officers in the British
navy who kept insisting that it should be tried. In the
discussion I took my stand emphatically on the side of this
school. From the beginning I had believed in this method
for combating the U-boat warfare. Certain early
experiences had led me to believe that the merchant
captains were wrong in underestimating the quality of their
own seamanship. These intelligent and hardy men did not
know what splendid ship handlers they were. In my
discussions with them they had disclosed an exaggerated
idea of the seamanly ability of naval officers in
manœuvring their large fleets. They attributed this to the
superior training of the men and the special qualities of the
ships. “Naval vessels are built so they can keep station
and turn at any angle at a moment’s notice,” they would
say, “but we have no men in our ships who can do such
things.” They particularly rejected the idea that when in
formation they could manœuvre their ships in fog or at
night without lights. They believed they would lose more
ships through collision than the submarines could sink.
 AMERICAN YACHTS CLUSTERED INSIDE THE
BREAKWATER, BREST

As a matter of fact, these men were entirely wrong and I

knew it. Their practical experience in handling ships of all
sizes, shapes, and speeds under a great variety of
conditions is in reality much more extensive than naval
officers could possibly enjoy. I was sure that they could
quickly pick up steaming and turning in formation under
the direction of naval officers, the convoy commander
being always a naval officer. Indeed, one of my
experienced destroyer commanders reported afterwards
that while he was escorting a convoy of twenty-eight ships
of different sizes, shapes, speeds, nationalities, and
manœuvring qualities, they kept their stations quite as well
as battleships. This ability was displayed when the convoy
executed two fleet evolutions in order to avoid a
submarine.
This well-earned tribute to the master mariners who risked their
lives and their ships, voyage after voyage, finds confirmation in the
records of the Corsair. During the first cruise of February one finds
such entries as these:
 At 11.45 p.m. ran into a thick fog. During the mid watch
(February 11th) the Munindies increased speed and came
up close under the stern of the Corsair. Later on she
passed and at 6 a.m. was about 700 yards on port bow of
Corsair. At daylight the fog lifted and all ships were in sight
but somewhat scattered. Convoy reformed in good order
and began to zigzag.
On the night of February 12th, about 1.50 a.m., sighted
two boats on the port quarter, distance 1000 yards. Boats
made signals with rockets and flash lamps. About this time
the escort vessel Wakiva opened fire, the shells falling
about 600 yards astern of the Corsair. Signalled to Wakiva
that she was firing at survivors and ordered her to pick
them up. The convoy stampeded, assuming a submarine
attack, and was reformed in good order about 3 a.m.
Running through fog and darkness, again startled by the sound of
guns, the steamers of this convoy “reformed in good order” and
steadily, pluckily held on their blindfolded course. Only a sailor could
realize the immense difficulties of the job and how well it was carried
on by the plodding merchantmen who won no glory. The convoys
were growing larger and more complex to handle as the success of
the system was demonstrated. Where the Corsair had escorted two
or three steamers in a group, fifteen or twenty were now sent out
together. Her next tour of sea duty in February was a fair sample of
the work which was to continue through many wearisome weeks,
with little more diversion than a variety of uncomfortable weather.
In obedience to radio orders [runs the report] the U.S.S.
Corsair anchored at Verdon 11.45 p.m., February 16th.
Upon arrival found the U.S.S. Aphrodite, U.S.S. May, and
French sloop Regulus for the same duty. On the morning
of February 17th was informed that the convoy would be
delayed one day on account of the non-arrival of some of
the ships. At 3 p.m. commanding officers of convoy and
escort present reported aboard the French station ship
Marthe Solange for orders and conference with the
commanding officer of the Sixth Patrol Squadron of the
 French Navy. The additional escort, the French destroyer
Aventurier, arrived during the conference. Orders and
information sheets were given to all concerned and
explained or discussed with the convoy captains. It was
decided to show no stern lights.
On February 18th the Aphrodite got under way, followed
by convoy vessels Numbers 1 to 6 inclusive, in column.
The Regulus preceded the Aphrodite as pilot vessel. At
7.30 a.m. the Corsair got under way, followed by convoy
vessels Numbers 9-10-11-12 in column, and when clear
the May followed with convoy vessels Numbers 13-14-15.
Number 16, the American steamer Camaguey, did not
arrive to join the convoy. When the Aphrodite cleared the
net she proceeded at six knots and convoy formed in
double columns—ships 1-2-3-4—May—13-14-15 in left
column, and ships 5-6-7-8—Corsair—9-10-11-12 in right
column. After passing the last buoy of Matelier Channel,
convoy formed in four columns and took up speed eight
knots. Aphrodite (chief of escort) patrolled ahead; Corsair
and Aventurier on starboard flank; May and Regulus on
port flank. A motor patrol boat escorted until about 3 p.m.
and then turned back. The sortie was preceded by French
aeroplanes.
Zigzagged until dark, then convoy steered base course.
Fine weather, heavy swell running from NW which did not
retard the eight knot ships.
February 19th, convoy zigzagged during daylight. Good
weather for convoy operations.
February 20th, steamed with convoy until 10 a.m., then
dispersed as per orders. The Aphrodite, Corsair, and May
returned to Pauillac for coal and the French escort shaped
course for Brest.
In the search for incident during this long period of hard work and
few thrills, one must have recourse to the letters and diaries of the
Corsair’s crew and pick out bits here and there. These hardy young
salts were playing the game in a fashion something like this:
On a run one night in March (to La Pallice) after leaving
a Verdon convoy, the Corsair and Aphrodite ran into a
pretty stiff blow. We were doing about fourteen knots or
better with the wind and sea a little on the port bow. A
good-sized sea slapped into the port side forward, by the
petty officers’ quarters, smashing in one of the deadlights
of that compartment. The crash was tremendous.
Everybody asleep down there woke up with visions of the
ship torpedoed, and out of the hatch they boiled on the
jump, mostly arrayed in the costume which Nature
provides for sailors. All were dazed and excited. One of
them no sooner hit the deck than a wave lifted our bow
and he skidded aft, nearly half the length of the ship, on
the seat of his trousers or where his trousers should have
been. It was fortunate for that sailor that our executive
officer kept the decks smooth and well-cared-for. The outfit
couldn’t see the humor of the situation, being soaking wet
and unable to dope out what had happened.
March 4th. The ship was a mad-house to-day. They told
us there would be admiral’s inspection and we had to turn
to on everything from the bilges to the crow’s-nest. Every
stitch of clothing in our boxes had to be stowed
somewhere. I was never so bored in my life. We sat
around from noon to four o’clock waiting for the blinkin’
admiral, but, of course, he never showed up. These
admiral’s inspections always give me a pain in the eye.
We have made ready several times and it’s always a false
alarm.
March 10th. The Aphrodite spotted a floating German
mine and opened fire on it. She fired thirty-five shots and
never hit it. We turned around and sunk it on the third
shot. It did not explode, but filled with water and went
down after a hole was put through it.
 April 4th. Picked up our convoy consisting of the troop-
ships Powhatan, Martha Washington, and El Occidente,
all packed with Yankee soldiers. There are six destroyers
with the escort, including the Caldwell, one of the new
flush-deckers. At 1 p.m. the Occidente sighted a periscope.
We at once started submarine tactics, screening the
convoy while the Winslow and Sampson went back to look
for the sub. They dropped eighteen depth charges. Fritz
must have been shaken up some. He did not get a chance
to shoot a torpedo, for the destroyers were too alert.
April 5th. Captain Porter left the ship, going back to
America on leave. The rumor is that he will not return to
this ship. It would certainly be a big loss to us, as he is
one fine seaman and navigator as well as a splendid
character of a man. We gave him three cheers when he
shoved off, and it seemed to touch him considerably. He
stood at salute in the boat until out of sight.
April 6th. This is the first anniversary of our entry into
the war. In consequence, all the American vessels had to
dress ship. We coaled all day and will finish to-morrow. In
again, out again, coal again, Finnegan! The Martha
Washington discharged her troops. They were cavalry and
nigger infantry. They were held up for several hours and
the darkies had us rocking all the time. They claimed they
saw four submarines sunk the other day after being
attacked by eleven or nine.
April 9th. I got in trouble to-day. In the storm last night
an American ship came in and anchored four miles off. I
was on signal watch and read her flag hoist as LDBC, the
Rangely, and reported her as such. Discovered to-day that
she was the LDQC or Graster Hall. I caught all the blame.
The Q they had up was so terribly dirty that in the distance
and bad light it could not be taken for anything else than a
B. There was no alibi for me, however, and I don’t know
whether the bawling out I got will be all of it or not. It was
my mistake, an unavoidable one, but in war-time that
makes no difference in this man’s navy.
May 10th. Captain Kittinger is to be transferred to
command a big transport and Commander Porter is
coming back to take this ship. I shall be glad to see
Captain Porter, but we are mighty sorry to see Skipper
“Bill” Kittinger go. The Wakiva dropped over one of the
new 300-pound depth bombs and pretty near blew herself
up. She busted several things in her engine-room.
May 22nd. Just as we came off watch at 4 a.m. in a
dense fog we got an S.O.S. from our old friend, the
Wakiva. She was rammed and sunk by the Wabash of her
convoy. She went down rather deliberately and only two
men were lost. We are sorry to cross her off the list, as
she was a willing worker, although slow. At 8 p.m. we met
the largest convoy of troop-ships that has come overseas.
The first group of fourteen ships carried forty-five
thousand soldiers, to say nothing of the naval crews
aboard, and there were twelve destroyers in the escort.
The second group of nine ships had twenty-five thousand
troops. It was a great sight. They will be landed at Brest.
 THE FAITHFUL WAKIVA, WHICH WAS SUNK IN
COLLISION

BIG TRANSPORTS IN BREST HARBOR

May 24th. Hooray! We have thirty-five German

prisoners to shovel the coal from the lighters into the