Advanced Financial Analysis

Advanced Financial Analysis

Euromoney Training
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This four day workshop takes a hands-on approach to financial analysis and cash flow techniques, featuring: What are the fundamental theoretical factors that underlie valuation and how can this theory be used in a practical manner How can you get around major problems with the DCF model which include wide range in valuation results and estimation of residual value How do long-term versus short-term growth rates, risk premiums and costs of capital drive multiples such as the P/E ratio and the EV/EBITDA ratio and how can these multiples be used in valuation What adjustments should be made to cash flows and valuation formulas to adjust capital expenditures, deferred taxes, high coupon debt, wor…

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Didn't find what you were looking for? See also: Financial Analysis, Debt, Accounting, Financial Management, and Risk Analysis.

This four day workshop takes a hands-on approach to financial analysis and cash flow techniques, featuring: What are the fundamental theoretical factors that underlie valuation and how can this theory be used in a practical manner How can you get around major problems with the DCF model which include wide range in valuation results and estimation of residual value How do long-term versus short-term growth rates, risk premiums and costs of capital drive multiples such as the P/E ratio and the EV/EBITDA ratio and how can these multiples be used in valuation What adjustments should be made to cash flows and valuation formulas to adjust capital expenditures, deferred taxes, high coupon debt, working capital, stock options, sustainable rates of return and derivatives What can be done to effectively present risk analysis in valuation analysis models without requiring a PHD in physics Can Monte Carlo simulation and mathematical techniques realistically be used to assess risk and compute value? The course begins by reviewing lessons on valuation, risk assessment and forecasting that can be derived from the financial crisis. A lecture and discussion reviews mistakes made in valuing sub-prime loans compared to other famous valuation errors. This introduction demonstrates that real valuation errors were not made by wrongly estimating items like Beta, the weighted average cost of capital or wrongly measuring surplus cash. Instead, mistakes in evaluating value drivers, effects of surplus capacity and lack of independent analysis has driven most valuation problems. Review of valuation lessons at the beginning of the course provides context for other subjects in the course. Corporate Valuation Modelling uses case studies, hands-on analysis and template models as the primary teaching tools. However, in teaching this course in the past, we have found that some participants are interested in practical mechanics of Excel (macros, offset and indirect functions etc.). Added optional sessions will be held after 5:00 PM to provide instruction on many practical Excel topics.
Day 1 Multiples and Discounted Cash Flow Valuation fundamentals and mechanics Definition and importance of valuation Two problems in valuation: forecasting cash flow and measuring risk of the cash flow Forecasting cash flow Definition of cost of capital and risk premium Discounting future cash flow Importance of growth in valuation Exercise on valuation of risky bonds Introduction to excel short-cuts Use of true/false switches Theory of valuation and practical problems Instability of beta and evidence from financial crisis Changing investor returns and measurement of EMRP Problems in measuring length and magnitude of growth rates Practical problems with finance theory Difficulty in putting a number on risk Changing investor returns and measurement of EMRP Invalidity of the CAPM Cost of equity capital and cost of debt Problem of attempting to measure risk Mathematical measurement of risk Use of statistics in measuring risk Use of break-even and scenarios in measuring risk General definition and components of cost of capital Consistency of forecasts and inflation rate Risk free rate and inclusion of real interest rate Real interest rate and real growth in economy Risk premium for debt Risk premium for equity Measurement of cost of equity with CAPM Measurement of risk free rate Alternative measurement of beta Difficult problem of equity market risk premium Alternative ways to measure cost of equity Dividend discount model Use of P/E ratio Use of M/B ratio Project finance, LBO and surveys Value drivers and valuation using discounted cash flow Drivers of value: return versus cost of capital and growth Real world issues in computing return on invested capital and return on equity Reconciliation of invested capital from assets and Liabilities side of balance sheet Non-associated investments and discontinued operations Accumulated other comprehensive income and derivatives Importance of computing return on investment in valuation Exposure to threats of competition Debates concerning gradual movement of return on investment to cost of capital Use of ROIC in assessing the reasonableness of financial forecasts Case study of analysis actual DCF model Calculation and theoretical basis of free cash flow Mechanics and presentation of DCF Alternative computations of WACC and cost of equity Different calculations of terminal value Mechanical problems with WACC and DCF Computation of cost of equity from un-levered and relevered Beta Reconciliation of free cash flow to equity cash flow and debt cash flow Development of DCF model through construction of simple model Use of market weights and incremental cost in computing WACC Use of switches for flexible timing Computation of free cash flow Theory and calculation of terminal value using three approaches Growth model Value driver - ROIC, growth and cost of capital Application of multiples Analysis of DCF model Efficient use of data tables and major problem of value Ranges with growth method Reduction of value range with EV/EBITDA Valuation using multiples Case study of using multiples in valuation Process of deriving valuation from comparative multiples Alternative multiples and which multiple to use Problem and biases in comparative valuation Reconciliation of P/E ratio and EV/EBITDA ratio Case study of using P/E ratio in valuation Importance of P/E ratio in valuation Process of deriving future stock price Relation between equity cash flow, P/E ratio and DCF process Derivation of future P/E ratio Derivation of P/E ratios from value drivers Model of valuation from equity cash flow Derivation of formula for dividend pay-out ratio and growth rate Computation of P/E ratio and market to book ratio Evaluation of the cost of equity capital from the P/E ratio and use of goal seek together with macro in excel Derivation of EV/EBITDA ratio from value drivers Importance of stable ratio of capital expenditure to depreciation and ratio of depreciation to net plant Cycle of plant and change in growth rates Calculation of NOPLAT and free cash flow Analysis of enterprise value and free cash flow Transition periods and underlying value drivers Computation of components of cost of capital Changes in growth rates and transition periods Convergence of cost of capital and return on capital Incorporation of transition periods in P/E and EV/EBITDA analysis Analysis of P/E and EV/EBITDA ratio with alternative value drivers and alternative transition periods Analysis of actual P/E, EV/EBITDA and M/B ratio Theory of establishing comparable samples M/B ratio and roe Use of M/B ratio in deriving cost of equity Regression analysis of multiples Factors that should drive the multiples Adjustment of sample companies Construction of regression analysis Interpretation of regression analysis Day 2 Complex accounting and finance issues in applying the discounted cash flow model Use of EV/EBITDA ratio and alternative transition factors in terminal value Problems with growth, value drivers and multiples in terminal value calculations Computation of EV/EBITDA after growth transition Sensitivity analysis with alternative value drivers Establishment of stable period in DCF calculation Problems without stable period – example of working capital Mechanics of computing stable period Adjustments in stable period Relationship between growth and cost of capital Cost of capital model Convergence between cost of capital and return on capital Declines with stable cash flows Inclusion and exclusion of items in bridge between equity and enterprise value Market value versus accounting book value in bridge Market value of debt versus book value of debt and Valuation of derivatives Valuation of deferred taxes in cash flow or bridge Valuation of non-associated investments and other assets Valuation of minority interest on balance sheet Valuation of pension liabilities Valuation of stock options Day 3 Corporate Modelling for Valuation Comprehensive model for computing value from free cash flow and for computing return on invested capital Efficient model structure Flexible, accurate, structured, transparent Complex modelling issues in corporate model Time periods and incorporation of history Computation of market shares and volumes from industry demand and supply Depreciation and retirements Deferred taxes and implied tax versus book depreciation Avoiding bad programming practices Long-formulas Mixing inputs with calculations Non-modular structure Inconsistent time lines Circular references Setting up corporate model Importance of time line and using true/false commands along with and function Use of dates and edate function to enter historic period, transaction period, explicit period and stable period and use of data validation to limit time period increments in the model Historic period and flexibility to add new historic financial statements Development of assumptions module Use of historic financial statements and operating reports to establish assumptions Structure of assumptions – operating assumptions, tax and depreciation assumptions, financing assumptions, valuation parameters Alternative set-up of time series assumptions with index function Setting-up model integrity page Idea of effective integrity page; find and report errors without having to look around model Tests in corporate model – historic income statement, historic balance sheet, debt balance, prospective balance sheet Putting together the integrity label with if tests Operating analysis, working capital, depreciation and free cash flow Operating analysis Converting annual growth rate, inflation and other assumptions to periodic assumptions Use of lookup function (rather than vlookup) in converting assumptions Developing transparent formulas Effective display historic analysis together with prospective assumptions Working capital analysis Use of historic balances and projected balances with historic switch Accumulation of working capital and calculation of changes in working capital Depreciation and deferred tax analysis Potential distortion created by not accounting for retirements Existing depreciation on net plant and use of stable ratios using offset function for computing retirements Calculation of depreciation using SUMPRODUCT function Calculation of discounted cash flow and return on invested capital Computation of EBITDA, EBIT and operating taxes Presentation of free cash flow and enterprise value Calculation of enterprise value and EV/EBITDA together with return on invested capital Equity cash flow and credit analysis for full corporate model analysis Structure of financial model and accounting framework Inclusion of debt and liabilities Importance of closing balance accounts for every balance sheet account Profit and loss statement for taxes and earnings Cash flow statement and computation of debt and cash balance Balance sheet as audit and verification tool Debt schedule Separation of long-term and short-term debt Importance of use of min function in modelling with example for long-term debt Computation of short-term debt and cash balances to tie cash flow together with balance sheet Use of MAX function to compute cash balances and short-term debt with assumptions for minimum cash balance Computation of financial statements General notion of only computing subtotals in financial statements Calculation of taxes in profit and loss statement Addition of net operating loss balance using max and min functions Adjustment for tax and book depreciation Computation of change in deferred tax and accumulated deferred tax Development of cash flow statement from EBITDA Computation of equity balance and balance sheet Alternative financing in corporate models Use of solver for target capital structure Computation of new equity issues and new shares Calculation of earnings per share, return on equity and return on invested capital Use of EPS and P/E ratio in valuation Calculation of EPS with alternative capital structure Inclusion of dividends and equity financing in cash flow Use of M/B ratio in terminal value Computing value per share from equity cash flow Day 4 Risk Analysis, Valuation and Modelling Sensitivity analysis, scenario analysis and tornado diagrams in valuation General discussion of risk analysis Break-even analysis Sensitivity analysis Scenario analysis Variance analysis Combination of scenario and sensitivity analysis Sensitivity and scenario analysis Sensitivity analysis on WACC and terminal growth Creation of calculation macro to improve data tables Creation of macro to save without re-computing data tables Use of macro to compute sensitivity analysis rather than using data tables Implementation of master scenario page Idea of control panel to manage key inputs and develop risk analysis Step by step process to add scenario analysis to any analysis to any analysis Incorporation of time series assumptions with changing year by year assumptions using index function Creation of sensitivity analysis from scenario analysis to evaluate relative effects of changing different assumptions Addition of sensitivity scenario Monte Carlo simulation Volatility definition Incorporation of volatility in financial models Time series analysis parameters Mean reversion, price boundaries and equilibrium Application of Monte Carlo simulation Computations using Monte Carlo Distribution of IRR and npv Computation of probability of default Value of financial options Value of real options Alternatives to DCF and multiples - leveraged Buyout, Structured Finance and M&A Valuation Valuation and modelling for leveraged buyouts Overview of valuation models that do not require estimation of WACC or terminal growth LBO analysis Project finance analysis M&A consolidation analysis Theory of using debt capacity to assess risk and value Risk analysis in measurement of debt capacity Computation of project IRR versus equity IRR Trade-off between financial risk and operating risk Review of multiples and terms for leverage buyout EV/EBITDA entry multiples Holding periods Exit strategies Debt to EBITDA and financing Structure and format of a leveraged buyout model Holding period Transaction assumptions Sources and uses analysis Cash flow waterfall Equity cash flow Objectives and complexities Computation of equity IRR from alternative purchase Prices and alternative capital structures Development of pro-forma balance sheet Construction of cash flow waterfall Income tax adjustments Calculation of default points and IRR on alternative debt Instruments Structuring alternative debt instruments Pro-forma balance sheet Alternative structuring of acquisition assumptions Inputs for debt: amortising debt, bullet debt, capitalizing debt, revolving debt facility, minimum cash requirements Accounting inputs and goodwill Consideration and existing equity Increase in valuation of assets and liabilities Calculation of deferred taxes Goodwill computation Cash flow waterfall and debt module Structure on model and connections between debt schedule and cash flow statement Complexities in computing A,B and C debt with use of switches and min function Structuring of cash flow statement with numerous subtotal accounts Key programming concept in LBO model – combined use of min and max functions Computation of draws and repayments from revolving credit facility with min and max functions Computation of debt defaults with min and max functions Risk analysis with LBO model Computation of IRR on equity, senior and subordinated debt Sensitivity analysis with different rates of return Calculation of break-even with data table, match and index Course summary and close
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