Types of

Financial Models

~ By edu CBA

What is a Financial Model?

• A financial model is a mathematical representation of the financial operations and financial statements of a company. It is used to forecast future financial performance of the company by making relevant assumptions of how the company would fair in the coming financial years.

• It is a risk management tool for analyzing various financial and

economic scenarios and also provided valuations of assets. • These models involve calculations, analyzing them and then

provide recommendations based on the information gathered.

Types of Financial Models

Discounted Cash Flow Model

Comparative Company Analysis model

Sum-of-the-parts model

Leveraged Buy Out (LBO) model

Merger & Acquisition (M&A) model

Option pricing model

Discounted Cash Flow model

• DCF is based upon the theory that the value of a business is the sum of its expected future free cash flows, discounted at an appropriate rate.

• Investors particularly use this method in order to evaluate

the potential of an investment and estimate the absolute value of a company.

Merger & Acquisition (M&A) model

• The entire objective of merger modeling is to show clients the impact of an acquisition to the acquirer’s EPS and how the new EPS compares with the status quo.

• In simple words we could say if the new EPS is higher,

the transaction will be called “accretive” while the opposite would be called “dilutive.”

Comparative Company Analysis model

• Also referred to as the

“Comparable” or “Comps”, it is the one of the major company valuation analyses that is used in the investment banking industry.

• In this method we undertake

a peer group analysis under which we compare the financial metrics of a company against similar firms in industry.

Leveraged Buy Out (LBO) model

• Leverage buy out deal involves

acquiring another company using a significant amount of borrowed funds to meet the acquisition cost.

• This kind of model is being used

majorly in leveraged finance at bulge-bracket investment banks and sponsors like the Private Equity firms who want to acquire companies with an objective of selling them in the future at a profit.

Option pricing model

• Option traders tend to utilize different option price models to set a current theoretical value.

• Option Price Models use certain fixed knowns in the present and also forecasts for factors like implied volatility, to compute the theoretical value for a specific option at a certain point in time.

Sum-of-the-parts model • It is also referred to as the break-up

analysis. • This modeling involves valuation of

a company by determining the value of its divisions if they were broken down and spun off or they were acquired by another company.

Thank

You!!!

https://www.facebook.com/CorporateBridgeGroup

Be a part of edu CBA Family!!!

Visit our website

For Free Resources

Like us on Facebook

Follow us on Twitter

https://www.educorporatebridge.com/

https://www.educorporatebridge.com/free-courses/

https://twitter.com/corporatebridge