Contents

       Introduction – who needs this book?

       Preface to the second edition 

       Acknowledgements            

       Conventions

       Executive summary

Part A  DEVELOPING FINANCIAL MODELS   

1               Overview     

Introduction                                                                     

What is financial modelling?

History of spreadsheets  

Power of spreadsheets  

Objectives for the book  

Example spreadsheet

Summary  

2               Design introduction             

Introduction

Basics of design

Objectives

User interface  

Key variables and rules  

Layout

Individual modules  

Menu structure and macros

Management reporting  

Future development

Testing

Protection  

Documentation  

Peer group comments

Summary  

3               Features and techniques

Introduction

Formats

Number format

Lines and borders  

Colours and patterns  

Specific colours for inputs and results

Data validation  

Controls – combo boxes and buttons

Conditional formatting  

Use of functions and types of function

Add-ins for more functions  

Text and updated labels

Record a version number, author, etc.  

Use names to make formulas easier to understand

Paste names as part of documentation  

Comment cells  

Graphics  

Dynamic graphs to plot individual series

Data tables

Scenarios  

Goal seek  

Solver 

Use of templates  

Summary  

4               Sample model

Introduction

Aims and objectives  

User needs and user interface  

Key variables and rules  

Breaking down the calculations into manageable groups

Setting up individual modules  

Menu structure  

Program sheets and macros

User assistance  

Summaries

Risk and multiple answers  

Testing and troubleshooting 

Protecting and securing  

Help and documentation  

Show to peers – take their advice

Control loop – listen, learn and modify

Summary  

5               Example model

Introduction

Case study  

Design

PPP 1

PPP 2

PPP 3

PPP 4

PPP 5

Documenting, testing and protecting  

PPP 6

Summary  

Part B  APPLICATIONS        

6               Analysing performance              

Introduction

Profit and loss  

Balance sheet  

Ratios

Trend analysis

Sustainability

Summary  

7     Cash flow      

Deriving cash flow  

Net operating cash flow (NOCF)  

Free cash flow  

Cover ratios  

International cash flow  

Summary  

8               Forecasting models 

Introduction

Historic forecasts  

Trend lines  

Trend lines for analysis

Data smoothing

Cyclicality and seasonality

Summary  

9               Forecasting financials

Introduction

Key drivers

Deriving financial statements

Alternative approaches

Financial analysis

Summary  

10               Variance analysis              

Introduction

Cash flow budgets

Monthly cash model

‘Flash’ report and graphics  

Summary  

11               Breakeven analysis

Introduction

Breakeven

Operating leverage  

Financial leverage  

Combined leverage  

Summary  

12               Portfolio analysis              

Introduction

Formulas  

Optimum portfolio  

13   Cost of capital 

Introduction

Capital Asset Pricing Model 

Dividend growth model

Cost of preference shares

Cost of debt  

Weighted average cost of capital

Marginal WACC

Summary  

14               Bonds            

Introduction

Cash flows  

Yield measures

Duration

Portfolio results

Summary  

15               Investment analysis

Introduction

Investment model revisited

Payback period

Accounting return

Net present value  

Internal rate of return

Benefit/cost ratio  

Management tests – cash flow, etc.  

Scenarios  

Sensitivity analysis and charts

Capital rationing

Summary  

16  Risk Analysis

Introduction

Risk assessment process and analysis

Risk adjusted rate  iation  

Coefficient of variation

Certainty equivalents

Real options

Simulation  

Summary  

17               Depreciation

Introduction

Straight line  

Sum of digits  

Declining balance

US MACRS  

Amortisation

Comparison

Summary  

18               Leasing         

Introduction

Rental calculations

Lease versus purchase  

Classification  

Accounting

Settlements

Summary  

19               Company valuation 

Introduction

Accounts  

Adjusted accounting value  

Dividends  

Stock market or market method

Free cash flows  

Summary  

20               Optimisation  

Introduction

Elements of optimisation models

Linear programming

Margin maximisation

Pensions  

Summary  

21       Decision trees   

Introduction

Bayes’ theorem  

Terminology

Decision tree model

Information example

Summary  

22   Risk management              

Introduction

Forward rate agreements

Swaps

Foreign exchange  

Futures

Options

Black-Scholes

Summary  

23   Data functions 

Introduction

Dataset

Database functions  

Descriptive statistics  

Histogram  

Function output 

Box plots  

Summary  

24   Data analysis

Introduction

Imported data  

Sort  

Filter  

Subtotals  

Pivot table and chart  

Database import

Radar chart  

Gauge chart 

Summary  

25               Modelling checklist 

Introduction

Design summary  

Features  

Techniques

Appendices

Appendix 1: Software installation

Appendix 2: Licence 

Appendix 3: File list              

Appendix 4: Microsoft Office 2007 (Office 12)

Bibliography and references

Index