BUILDING A MODEL

This is the most basic type of financial model. In this model, the statement of financial position (SFP), statement of comprehensive income (SCI), and statement of cash flows (SCF) are dynamically linked with formulas in Excel. The model's objective is to set it up, so all the accounts are connected, and a set of assumptions can drive changes in the entire model. Thus, it is important to link the three (3) financial statements, which require a solid foundation of accounting, finance, and Excel skills.

It is a specific type of financial model used to value a business. DCF is based on the three-statement model. However, the values of the statements shall be based on the Net Present Value (NPV) of the future cash flow. Thus, the DCF model takes the cash flows from the three- statement model and makes some necessary adjustments. After that, it uses the XNPV function in Excel to discount them back to today at the company’s Weighted Average Cost of Capital (WACC).

This is a more advanced model used to evaluate the pro forma accretion/dilution of a merger or acquisition. It is common to use a single tab model for each company, where the consolidation of Company A + Company B = Merged Company. This model is most commonly used in investment banking and/or corporate development.

Investment bankers and corporate development professionals use this model to value their business before going public. This model involves looking at comparable company analysis in conjunction with an assumption about how much investors would be willing to pay for the company in question.

A leveraged buyout transaction typically requires modeling complicated debt schedules and is an advanced form of financial modeling. An LBO is often one of the most detailed and challenging of all types of financial models. It is because the many layers of financing create circular references and require cash flow waterfalls. This model is common in private equity or investment banking.

This model is built by taking several DCF models and adding them together. Next, any additional business components that might not be suitable for a DCF analysis (e.g., marketable securities, which would be valued based on the market) are added to the value of the business. For example, one would sum up the value of business unit A, business unit B, and investments in C, minus liabilities in D to arrive at the company's Net Asset Value.

This model includes multiple business units added into one single model. Typically, each business unit has its tab, with a consolidation tab that simply sums up the other business units. This is similar to a Sum of the Parts exercise where Division A and Division B are added together, and a new, consolidated worksheet is created.

It is used to model finance for professionals in financial planning & analysis (FP&A) to get

the budget together for the coming year(s). Budget models are typically designed to be based on monthly or quarterly figures and focus heavily on the income statement.

It is used in financial planning and analysis (FP&A) to build a forecast that compares

to the budget model. Sometimes the budget and forecast models are one combined workbook, and sometimes they are separate.

There are two (2) main types of option pricing models: Binomial Tree and Black- Scholes. These models are based purely on mathematical formulas rather than subjective criteria; thus, they are more or less a straightforward calculator built in Excel.