PRINCIPLES AND PRACTICE

The most comprehensive AUSTRALIAN book on Financial Modelling
A step by step self learning approach to practical models in FINANCE

Designed for corporate modellers and students.
ISBN: 0-646-43261-3

OVERVIEW

This is really the fourth edition of a text which has now been developing for over 8 years. However this version involved such substantial upgrade that I have decided to re-christen it slightly. For those who acquired the previous version (3d Edition), every chapter has had some surgery, some quite major, and others totally new. With increased use of Case Studies in the ‘Applications' section, and the tendency for the book to find its way into more and more corporate libraries I have increased the use of Macros, screen control and presentation features. Today there is substantial interest in incorporating uncertainty into modelling structures and outcomes. Hence I have added two new chapters and substantial changes to an existing one to help modellers maintain sound and robust models while incorporating probability and variable uncertainty into predictive modelling.

The book is designed for Finance students, modellers and business people involved in financial modelling. Progressive in content, Part A (7 chapters) covers the tools and principles of modelling, introducing Excel functions and features. These early chapters also introduce readers to modelling techniques and methodology. Part B (9 chapters) includes most of the common modelling topics, while also introducing powerful tools for specific business modelling solutions.

An Excel framework file is provided with each chapter, in which there are a multitude of examples, tasks, problems and case studies. A step by step approach is used in all examples since the text is designed to facilitate and re-enforce self learning. Case study solutions can be obtained from the website (see ‘Case Studies' flag above).

(560 pages).

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CONTENT

Chapter 1 - Excel - Basic Features for Modelling
This is an introductory chapter on common modelling features of Excel. It includes graphical and arithmetic functions, operational rules, data and formula development, protection and printing, relatives and absolutes, and includes a section on the ever increasing menu options for spreadsheet formatting and control.

Chapter 2 - Advanced Features of Excel
More complex functions used in modelling are considered, including advanced functions for relationship building, logical functions, and table/database search features - using criteria selections processes. Importing data and creating pivot tables are examined.

Chapter 3 - Macros and Screen Control
Control of screen operations, functions creation and data manipulation through macros is the essence of this chapter. It includes use of Excel's macro recorder and development of functions and procedure type macros. The chapter develops the use of VBA code, and UserForms.
 
Chapter 4 - Model design and Development
This chapter examines the rationale behind modelling - its advantages and problems. A systematic approach to modelling is outlined together with a ‘universal' structure and common errors in model building explained. A complete model is developed in two different ways to illustrate the diversity of solution possibilities within a standard structure. 

Chapter 5 - Financial Functions
Excel financial functions from depreciation, through time value (both single sum and series functions) and DCF functions to bond valuation. Duration functions associated with MacCauley duration calculations are also covered.

Chapter 6 - Probability Concepts
This is the foundation chapter for two later applications chapters on introducing uncertainty into modelling. Statistical probability is considered in relation to Excel's statistical functions. All of the distributions in common use are illustrated as well as the major descriptors of uncertainty.

Chapter 7 - Forecasting With Excel
Forecasting is of primary importance to management, planners and investors. This chapter reviews all of the major techniques commonly used in establishing both long term and short term forecasts for static and non-static data. It shows how the powerful tools of Excel can be applied to both linear and non-linear forecasting models. The chapter includes examination of methods to test the most appropriate forecasting method.

Chapter 8 - Budgeting and Budgetary Systems
The chapter begins with cash budgeting, but the emphasis is on complete budgetary systems. This chapter examines the problem from both a single short term budgeting viewpoint, and as part of a complete long term budgetary strategy. Fixed and variable budgetary systems are built in Excel developing materials, production, cash, and capital integration.

Chapter 9 - Pro-Forma Statement Models
This chapter builds the most common pro-forma statements used in financial modelling with the emphasis on linkages and external funding models. It includes Working Capital and Free Cash Flow, as well as Performance and Position Statement forecasting models.

Chapter 10 - Statement Analysis
Modellers use accounting data and interpret it for assessment of performance, planning and control. This chapter focuses on ratio analysis, developing auto signalling models, common size analysis and finally, structured ratio systems such as Dupont.

Chapter 11 - Break-Even Analysis
The chapter examines both accounting and cash-flow break-even situations. Non-cash effect models are developed together with both operating and financial leverage consequences. The chapter includes non-linear cost and revenue modelling (using Excel graphing power and regression tools).

Chapter 12 - Applications of Probability
The first of two probability chapters dealing with uncertain variables, this one covers the various methods used to introduce uncertainty into models. They include Scenario and Sensitivity Analysis, Certainty Equivalence and Risk Adjusted Discount Rate, Pay-off Tables and Decision Trees.

Chapter 13 - Simulation Models
This chapter uses Excel's random number generation and probability distributions to develop Monte Carlo Value at Risk simulations. Queuing models are developed here for both single and multiple server environments. The chapter concludes with Markov modelling - Accounts Receivable (Bad Debts) and market share equilibriums.

Chapter 14 - Options and Portfolio Insurance
Both theoretical and practical aspects of share market investment are developed, providing the user with strong practical models. The topics covered include - Option valuation concepts (intrinsic and time value), Black and Scholes Option pricing , Convertible Securities pricing model, and portfolio insurance.

Chapter 15 - Equity and Portfolio Models
Models to value equity are developed using the commonly used formal valuation models for publically listed company securities. Both individual shares in isolation as well as those within a portfolio. The concept of correlation is used to build a ‘Markowitz' efficient portfolio. Bond valuation and duration models are also developed here.

Chapter 16- Advanced Corporate Applications
The chapter examines four areas of current interest:
 WACC - using project betas and after-tax funding costs.
Capital investment appraisal models using both DCF and accounting methods.
Leasing - both repayment scheduling, and lease/buy models.
Mergers and Acquisition valuation models.