Introduction to Financial Modelling
About the Course
The “Introduction to Financial Modeling” course is a composite of four courses, namely Ratio Analysis, Corporate Finance First Course, Credit Analysis and Cash flow summary and analysis.
This course begins with a review of financial terminology and definitions that will be used or are related to ratio analysis. An introduction to ratio analysis follows covering the various forms that the analysis may take, including inter & intra firm assessment and period and industry comparative analysis. Limitations to results and qualification are also discussed. The various categories into which the ratios are divided and the purpose of each category are then presented. The course concludes with two case studies showing illustrative examples of the analysis.
Corporate Finance – First Course
The course begins with a basic introduction of notation and terminology. This includes definitions for operating cycles, ownership structures and financial statements. The key concepts surrounding financial statements are further elaborated with the use of a sample balance sheet and explanations of various heads of accounts.
This is followed by an explanation of the associated concepts of risk and reward. Different types of returns are described. Time value of money including compounding and discounting are presented. Opportunity cost and the overhead in using borrowed money for investment, i.e. weighted average cost of capital are discussed. The calculation of interest on debt and interest on equity are further explained with examples.
A detailed case study follows that reviews the balance sheet and profit and loss statements of a given entity Electronic Arts (EA) and shows how to project the statements to future years and arrive at a valuation for the entity.
The course focuses on the borrowing decision of an entity, in particular the impact of leverage on a business. It begins by defining what leverage is and why it is important. Next the fixed and variable costs are and the difference between them are defined. Relevant range of production, breakeven point and margin of safety are defined and examples are used to demonstrate their calculations.
Operating and financial leverage are then elaborated on, including the degrees of leverage and the downside to each type of leverage. Finally these two leverages are combined to get the total impact of leverage. Examples are presented to illustrate the calculation of each form of leverage.
This course walks through the preparation of cash flow summary and assessment of cash flows.
4 EXCEL files containing the examples used in the PDF document are also included.
After taking this course you will be able to:
- Define short & long term insolvency
- Explain the difference between insolvency & bankruptcy
- Define fixed cost & variable costs
- Explain what a cost function is
- Calculate total cost
- Describe what relevant range of production means
- Define dividends
- Discuss net working capital
- Describe what the term “marketable” means
- Discuss why leverage is important
- List and describe the various stakeholders associated with a business
- Explain managerial efficiency & identify the ratios linked to it
- Explain fundamental analysis & identify the ratios linked to it
- Define a financial ratio
- Outline the differences between intra-firm ratio or trend analysis & inter-firm ratio industry average analysis
- List the common categories of ratios
- State the limitations of ratio analysis
- Discuss the role the cash position plays in the financial health of a company
- Explains the impact of debt or leverage on a firm
- Describe what is meant by productivity
- Explain the concept of profitability
- Calculate liquidity ratios like current & quick ratios
- Calculate leverage ratios like debt to equity, debt to assets, times interest earned & fixed charge coverage ratios
- Calculate profitability ratios like gross profit, operating profit and net profit margins, return on assets, return on equities and basic earning power ratio
- Calculate productivity ratios like inventory, fixed asset and total asset turnovers, average collection period & accounts receivable turnover
- List and define the various operating cycles of a firm
- List and define the various forms of ownership
- List and define the various financial statements
- Describe the various heads of accounts in the financial statements
- Describe what time value of money is and the concepts of discounting and compounding
- Calculate the present value of cash flows
- Calculate an internal rate of return (IRR)
- Define and differentiate between opportunity cost of capital and cost of capital
- Calculate the weighted average cost of capital
- Calculate the rates of return on debt and equity
- Describe the purpose of conducting industry analysis and a review/ analysis of management discussion
- Understand ways in which assumptions are set for financial analysis
- Project the income statement & balance sheet based on the assumptions defined
- Define and calculate free cash flows
- Use free cash flows and WACC to determine the value of an entity
- Assess whether an entity’s share price has been over or under priced
- Define what leverage is and why it is import
- Describe fixed and variable costs
- Calculate relevant range of production
- Calculate breakeven point
- Calculate margin of safety
- Define and calculate operating leverage and degree of operating leverage
- List the disadvantages of operating leverage
- Define and calculate financial leverage and degree of financial leverage
- List the disadvantages of financial leverage
- Calculate combined leverage
- Prepare cash flow summary
- Evaluate the impact of sales, trading activities, operations, financing costs, debt amortizations, fixed assets, intangible assets & investments, external financing on cash flows
- Assess cash flows
- Draw up a cash flow statement
The candidate should be comfortable with basic mathematics and EXCEL.
This course is for beginners in the finance field and is also aimed at banking and corporate teams.