Financial'Modelling!Exam%Revision!Module!One:!Introduction!to!Spreadsheets!What!is!Excel?!

• Excel&is&a&spreadsheet&program&in&the&Microsoft&Office&system.&We&can&Excel&to:&o Track&data&&o Present&data&in&a&variety&of&professional&looking&charts&o Write&formulas&to&perform&calculations&on&that&data&&o Build&models&for&data&analysis&

• Columns&are&ABZ&• Rows&are&1B100&• Ribbon&has&all&commands&by&tabs&on&it.&

Worksheet!Cells!• Relative&ReferenceB&cell&based&relative&to&the&cell&containing&the&formula.&Eg.&A1&• Absolute&ReferenceB&formula&refers&to&a&specific&cell.&Eg.&$A$1&

Data!Analysis!Toolpaks!• Select&–&Data&–&Analysis&

Protecting!and!Hiding!Data!• Hiding&is&done&by:&Right&click&column&and&select&hide.&• Protection&is&done&by&ReviewB&Protect&Worksheet.&

Data!Validation!• Data&validation&is&an&Excel&feature&that&you&can&use&to&define&restrictions&on&what&data&can&or&

should&be&entered&in&a&cell.&&• DataB&Data&Tools&• You&can&choose&to&have&three&types&of&data&alerts:&

o Stop&o Warning&o Information&

Graphs!and!Charts!in!Excel!• Line&chart&has&equal&spacing&between&xBaxis&items&• Scatter&chart&spaces&according&to&size&of&axis&entry&

&

!

! !

Module!Three:!Time!Value!of!Money!What!is!finance?!

• Finance&can&be&defined&as&the&art&and&science&of&managing&money.&&• Finance&affects&all&individuals,&businesses&and&governments&in&the&process&of&the&transfer&of&

money&through&institutions,&markets&and&instruments.&• 79&per&cent&of&the&chief&executive&officers&(CEOs)&rate&Finance&skills&as&the&most&required&for&

the&CEO&of&the&future&in&a&KPMG&survey.&

Time!Value!of!Money!• A&dollar&today&is&worth&more&than&a&dollar&tomorrow.&• !" = !"!!!(1 + !)!&

Compound!Frequency!• Compound$interest&arises&when&interest&is&added&to&the&principal,&so&that,&from&that&

moment&on,&the&interest&that&has&been&added&also&earns&interest.&• If&interest&was&paid&once&per&year.&This&is&called&annual$compounding.&Often,&interest&is&paid&

more&often&than&once&per&year.&• Compounding$frequency&B&The&number&of&compounding&periods&in&a&year.&

• !" = !" = (1 + !!)

!"#&

Annuity!• Annuity:&a&stream&of&equal&periodic&cash&flows&over&a&specified&time&period.&• Two&types:&

o Ordinary&Annuity:&Cash&flow&occurs&at&the&end&of&each&period.&o Annuity&Due:&Cash&flow&occurs&at&the&beginning&of&each&period.&&

! !"#$%&"'!!""#$%&!!!(1 + !)&• !"# = !"#!!! !! !!((1 + !)

! − 1) &

Present!Value!• Present&value:&If&you&are&promised&money&in&the&future,&how&much&is&it&worth&today&• !" = !"!!!(1 + !)!!&• !" = !"#!!! !! !!(1 − !

!(!!!)!) B&Present&value&of&an&annuity.&

NPV!• Computes&the&present&value&(not&net&present&value!)&of&a&series&of&payments.&• The&primary&difference&between&PV&and&NPV:&

o PV&allows&cash&flows&to&begin&either&at&the&end&or&at&the&beginning&of&the&period.&&o As&for&NPV,&cash&flows&must&be&equally&spaced&in&time&(must&be&constant&throughout&

the&investment)&and&occur&at&the&end&of&each&period.&

Module!Four:!Capital!Budgeting!Decisions!What!is!capital!budgeting?!

1. Investment&Decision&(Capital&Budgeting)&• LongBterm&investments&decisions&• What&projects&should&we&invest&in?&

2. Financing&Decision&(Capital&Structure)&• The&mixture&of&debt&and&equity&• What&is&our&target&capital&structure?&

3. Dividend&Decision&• Payout&decisions&• How&much&do&we&pay&shareholders?&

NPV!• NPV&is&the&present&value&of&all&the&cash&flows&relating&to&a&project&including&the&initial&

investment&which&is&normally&a&negative&value.&• If&NPV&is&greater&than&zero&then&accept.&

• !"# = !!"! + ! !"!(!!!)!&

o !"! = !"!#!$%!!"#$%&'$"&&o !"! = !"#!$%!&!!"#ℎ!!"#$&o !! = !!"#$!!"!!"#$%"&!(!"##)!o !! = !!"#$%&!!"!!ℎ!"ℎ!!!!"!!"#$%$!o !! = !!"#$!!"!!!!"#$%&&

• !"# = !!"!#!$%!!"#$% + !"#(!"!"#"$!!!"#$, !"#!!"!!"#$!!"#$%&'()&• !"#$ = ! (!"#$%&'(!!"#$,!"#ℎ!!"#$%,!"#$%)!–&used&when&different&periods.!• !"#!!"#$!!"# = !!"!!"#$%/1 + $!"!!"#$%)^!"#$ − 0.5!

IRR!• Internal&Rate&of&Return&(IRR)&is&the&percentage&return&that&discounts&all&cash&flows&from&a&

project,&including&the&initial&investment,&to&zero.&

• 0 = !!"! + ! !"!!!"" !&

o !"! = !"!#!$%!!"#$%&'$"&&o !"! = !"#!$%!&!!"#ℎ!!"#$&o !! = !!"#$%&!!"!!ℎ!"ℎ!!!!"!!"#$%$!o !! = !!"#$!!"!!!!"#$%&&

• !"" = !!""(!"!#!$%!!"#!!"#!!"!!"#$!!"#$%&'()&• If&IRR&is&greater&than&interest&rate,&accept&project.&• When&there&is&two&IRRs&the&project&must&be&executed&if&IRR&falls&between&

these&two&values.&• XIRRB&use&when&different&periods.&&!"## = !!"##(!"#ℎ!!"#$%,!"#$%)!

Summary!• When&NPV&and&IRR&conflict&use&NPV.&• NPV&is&in&dollars&where&IRR&is&percentages.&

&