This document provides an overview of using Excel for finance. It discusses key Excel concepts needed for finance like variables, formulas, and data tables. It explains how to build financial models in Excel to make investment and financing decisions by projecting accounting statements and cash flows. Key parts of a financial model in Excel are assumptions, projected financials, and free cash flow calculations. The document also covers discount rates, net present value, internal rate of return, and other concepts for evaluating strategic alternatives in Excel.

1. Finance
With Excel
Michael Herlache MBA
Doctorate of Business Administration in Finance Candidate 2020
Investment Banking, AltQuest Group
Finance
With Excel

2. Index
I. Finance with Excel
II. Excel Concepts Needed for Finance
III. Express Decisions with Excel
IV. Using a Financial Model for Decision Making: The Investment Decision
V. Using a Financial Model for Decision Making: The Financing Decision
VI. Wealth Maximizing Decisions
VII. Cash is King
VIII. Cash Flow Definition
Finance
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3. I. Finance with Excel
Express your decisions using Excel. Excel is the premier business
computational tool
Implement financial analysis using the tool for financial analysis, Excel
Valuation process
Heart of finance is time value of money and discounting
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4. II. Excel Concepts Needed for Finance
1. Write down variables (defining the parameters of the decision)
2. Absolute or relative values copying (=A1) (=$A$1) and formulas
3. Functions (=fx( ))
4. Data tables (“sensitivity tables”)
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5. III. Express Decisions with Excel
Implement financial analysis with Excel
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6. IV. Using a Financial Model for Decision Making: The Investment Decision
Ability to get financing from financial institutions depends on ability to
make a financial model for the new or existing business
The financial model projects future earnings from the organization
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7. IV. Using a Financial Model for Decision Making: The Investment Decision Continued
Predict the future performance of a firm.
Accounting statements report what happened to the firm in the past. A
financial model predicts what the firm’s accounting statements will look like
in the future. Start by taking the initial accounting statements and inputting
them into Excel
Difference between accounting and financial model is in the current assets
and current liabilities. In financial model we are concerned only with
operating assets and operating liabilities. We exclude financing related
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8. IV. Using a Financial Model for Decision Making: The Investment Decision Continued
Financial model has three components:
1. Model parameters (value drivers)
2. Financing decision assumptions (i.e. Mix between debt and equity,
what does firm do with excess cash? Repay debt, payments to
shareholders, or as cash balance)
3. Pro forma financial statements
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9. IV. Using a Financial Model for Decision Making: The Investment Decision Continued
Cash in the financial model is a plug. The plug is so that the balance
sheet balances.
Cash = total liabilities and equity – current assets – net fixed assets
The plug is the balance sheet item that guarantees the equality of the
future projected total assets and future projected total liabilities and
equity. Every financial model has a plug and the plug is almost always
cash, debt, or stock.
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10. IV. Using a Financial Model for Decision Making: The Investment Decision Continued
Financial Model and Valuation Process:
1. Assumptions (value drivers)
2. Existing accounting statements (IS and BS)
3. Projected financial statements
4. Free cash flow calculation (FCFs)
5. Terminal value calculation
6. Valuation calculation
7. Sensitivity table for major value drivers to see range of valuation
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11. IV. Using a Financial Model for Decision Making: The Investment Decision Continued
Once the financial model is complete (i.e. accounting statements have
been projected), we can use the model to:
1. Value the firm by projecting free cash flows (FCFs)
2. Determine ability of firm to pay it’s debts (i.e. credit analysis)
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12. V. Using a Financial Model for Decision Making: The Financing Decision
All companies must decide how to finance their activities
Proportion of debt and equity
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13. V. Using a Financial Model for Decision Making: The Financing Decision
The discount rate should be appropriate to the riskiness (i.e. variability
or beta) of the cash flows being discounted.
Discount rate is also called interest rate, cost of capital, opportunity
cost.
Compute annualized IRR
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14. V. Using a Financial Model for Decision Making: The Financing Decision
The cost of capital of an investment is related to the risk of the cash flows of
the investment. The relationship of individual asset returns to the risk is
called the security market line (SML). You can use SML to get the discount
rate for individual investments. The SML is used for private companies.
The cost of capital of an organization is related to the risk of the combined
riskiness of the investments in the portfolio. The relationship of portfolio
returns to the risk is called the capital asset pricing model (CAPM). You use
CAPM to get the discount rate (i.e. cost of capital). When the investment is a
public security, you use CAPM since the buyer of the security will have a
portfolio to diversify away risk.
Portfolio risk is associated with statistics.
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15. VI. Wealth Maximizing Decisions
1. Investment decision – What is it worth? NPV of strategic alternative
2. Financing decision – What does it cost? IRR of financing alternative
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16. VII. Cash is King
Wealth maximization has to do with maximizing cash. Cash in the
context or organizations is known as cash flow.
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17. VIII. Cash Flow Definition (FCF)
Profit after taxes
+ Depreciation (noncash expense)
+ Change in net working capital (- increase in current assets and +
increase in current liabilities)
- Capital expenditures (CAPEX)
+ After-tax interest payments
= Free Cash Flow (FCF)
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18. VIII. Role of the Finance Professional
The role of the financial professional is to quantify the cash flows and
risk of strategic alternatives available to the individual or organization.
Investment bankers compute the IRR and NPV of strategic alternatives.
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19. VIII. Capital Markets and Information
Information is valuable in determining investment and financing
decisions in the capital markets. Overall, markets are weak form
efficient meaning that their valuations reflect previous stock price
performance (i.e. stock price data) and are sometimes semistrong
meaning that valuations incorporate all public information. Capital
markets are not strong form efficient meaning that valuations do not
reflect private information.
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20. VIII. Multiple Investment and Financing Decisions: Portfolio
When there is multiple investment and financing decisions, we have
something called a portfolio. The discount rate can be decreased by
diversifying with a portfolio. When the discount rate is decreased, the
valuation of the portfolio increases as cash flows have maintained more
value.
A corporation/organization is simply a portfolio of sources and uses
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21. VIII. Modeling a Strategic Alternative
1. Put all variables (“value drivers”) at the top of the spreadsheet
2. Never use a number where a formula will also work
3. Blue for hard codes
4. Black for links and outputs
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22. VIII. Finance: Exchanging Value Through Time
Assets have a time dimension
Future value function =FV( )
Value in the future of a sum of money compounded into the future
Present value =PV( )
Value today of future payments discounted to present
Net present value (NPV) =-First payment + NPV( )
Incremental wealth increase earned by a strategic alternative. NPV tells you economic value of an investment
today. Always use NPV in the investment decision.
Internal rate of return (IRR) =IRR( )
Compound rate of return earned by a strategic alternative
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23. VIII. Rate of Return vs. Cost of Capital
What is the asset’s IRR?
Compare to the cost of capital (Effective annual interest rate – which is
the annualized IRR used to compare financing alternatives aka
Compound Annual Growth Rate (CAGR))
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24. VIII. Cost of Capital
Calculate IRR of financing alternatives to determine cost of capital
Need to get IRR in annual terms to facilitate comparison. May have to
start with monthly IRR then annualize
Annualized IRR = (1 + Monthly IRR)^n-1
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25. VIII. Finding a Value in a Financial Model
When we want to find a value by setting a particular value to another
cell, we use:
Goal seek – Alt, A, G
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26. VIII. Financing Alternatives: Loan Amortization
=PMT( )
To calculate the debt payment per period
=IPMT( )
To calculate the interest portion of the payment of debt
=PPMT( )
To calculate the principal portion of the payment
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27. VIII. Financing Alternatives: Direct Comparison
IRR of differential cash flows tells you the cost of the option
IRR tells you the cost of the financing alternative
CAGR is Effective Annual Interest Rate (EAIR) to allow for comparison
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28. VIII. Analyzing the Strategic Alternative: Sensitivity Table
Data Table is Alt, A, W, T
Tells you how output changes with incremental changes in the inputs
(i.e. variables)
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29. VIII. The Financing Alternative: Nominal vs. Real Cost
In determining the true cost of a financing alternative, it is important to
use the real rate of interest which incorporates inflation. The real rate
of interest is determined by using the real cash flows.
Inflation acts as a discount rate
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30. VIII. Strategic Alternatives Analysis
For each strategic alternative, compute the NPV and IRR, then have
decision rules for investing including:
1. Minimum NPV
2. Hurdle rate (IRR)
You are using NPV and IRR to make investment decisions but you need
the discount rate. The discount rate is associated with the financing
decision
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31. VIII. Cash Flows and Risk
Are cash flows riskless (i.e. treasury bills) or are they risky (i.e. market
portfolio)
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32. VIII. Cost of Capital and Opportunity Cost
The returns of similar investments should be used as the cost of capital
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33. VIII. The Discount Rate
An organization’s discount rate is the cost of equity and cost of debt.
The cost of the total capital structure is known as the Weighted
Average Cost of Capital (WACC):
WACC = rE* (E/(E+D)) + rD (1-Tc)*(D/(E+D))
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34. VIII. Value of Equity
The value of equity is the present value of all future dividends
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35. VIII. Sources & Uses
Uses Sources
Free Cash Flows WACC
CAPM to get cost of equity
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36. VIII. Accounting Statements: Statement of Cash Flows
The purpose of the statement of cash flow is to explain the increase in
the cash accounts on the balance sheet as a function of the firm’s
operating, investing, and financing activities.
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37. VIII. Valuation Methods: Total Enterprise Value (TEV) vs. DCF
1. Market valuation:
Total Enterprise Value (TEV) = MVE + MVD + Preferred – Cash
2. DCF Method (intrinsic value) = PV(FCFs) @ WACC + liquid assets
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38. VIII. Accounting Value vs. Finance Value
Accounting value of firm is backward looking and thus incorrect to use
in valuation. Finance value is forward looking and consistent with the
fact that the owner of an organization or security has claims on the
future cash flows of the business.
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39. VIII. FCF and DCF
Free cash flow (FCF) calculations is DCF
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