Corporate Bridge Financial Modeling Ebook - Part 4

All Rights Reserved.
Corporate Bridge
TM

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www.educorporatebridge.com
Financial Modeling E-book
Part 4 of 4
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All Rights Reserved. Corporate Bridge
TM
Debt and Interest - Schedule
Calculate Cash Flow Available for Debt Repayment
Reference in past information on Long Term Debt
Make sure to enter the mandatory Long Term Repayments (refer to repayment schedule provided in
the Annual Report in the discussion on Debt Section)
Calculate forecasted Long Term Debt Repayments
Calculate Cash Flow Available for Revolver
Revolver = Cash Sweep
Calculate Interest Expense/ Income
Refer to average debt balances
Revolver interest expenses
Long Term interest expenses
Cash Balance for Interest/ Income
Link Up
Forecasted interest expense/ income to Income Statement
Forecasted debt repayments/ borrowings to Cash Flow Statement
Forecast debt balances to the Balance Sheet

Private and Confidential Not for Circulation
2
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Debt and Interest Schedule - Sample
3
Set up a Debt Schedule
Reference the Cash Flow Available for Financing
Reference all equity sources and uses of cash
Referenced
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4
Calculate Cash Flow from Debt Repayment
Reference the Beginning Cash Balance from the Balance
Sheet
Deduct a minimum cash balance
Skip Long Term Debt Issuance/ Repayments, Cash
available for Revolving Credit Facility
and Revolver section for now
Assumption
Calculations
Reference
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5
Reference the historical long term debt balances from the Balance Sheet
Reference
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6
Input the future debt repayments fill in the known aggregate maturities
of long term debt
INPUTS from known debt maturities
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7
Forecast future debt balances
Reference beginning balance
Calculate forecast ending balance
References
Calculations
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8
Reference Long Term Debt Issuance and Long Term Debt (Repayments)
Calculate Cash Available for Revolving Credit Facility
References & Calculations
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9
Reference the past revolving credit facility balances from the Balance
Sheet
References
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10
Set up the logic for the revolver the cash sweep must be able to:
Borrow if a cash flow deficit
Pay down itself with free cash flow
Stop at a zero balance
References
Cash Sweep
(use MIN logic)
Calculations
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11
Calculate interest expense from Revolver
Calculate the average balance
Make a reasonable assumption for an interest rate
Forecast interest expense
Calculations
Assumption
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12
Calculate interest expense from the Long Term Debt
Forecast the interest expense
Calculate Total Interest Expense
Calculations
Assumption
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13
Calculate interest income from Cash Balances
Forecast the interest income
Calculations
Assumption
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Link up interest expense and interest income to Income Statement
References
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15
Link up debt repayments and borrowings to Cash Flow Statement
References
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16
Link the debt balances to Balance Sheet
Review final logic for totals and other statistics
References
Calculations
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Illustrative Flow of Funds

17
Debt & Interest Schedule
Income
Statement

Cash Flow
Statement

Balance
Sheet
Working
Capital
Sales
COGS
Change in WC
Working Capital
PP & E,
Depreciation
Depreciation
Intangibles,
Amortization
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Intangibles
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Other Long
Term Items
Shareholders
Equity
Other Long
Term Items
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Trouble Shooting Your Model
18
Circular References
Understanding what it means?
Designing a solution for fixing circular references
Balancing the financial model
Error handling and tracing the logic of the model
Final Touches
Validate assumptions
Ensure formulae are in place
Make sure formatting is as desired

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Dealing with Circular Models
19
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What is Circular Reference
20
Free Cash Flow
Interest Expense
&
Interest Income
Revolver Balance
& Cash Balance
Net Income
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Calculating a Circular Reference
21
Excel cannot calculate automatically when the model contains a circular reference
Turn ON Iterations in order to resolve the situation
Tools -> Options -> Calculation Tab

Iterations Create embedded errors
Potentially destructive problem

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Embedded Errors
22
#Value a cell reference to a letter rather than a number
#Ref reference to a cell that no longer exists
#DIV division by Zero or a Blank Cell
#Name reference to a name that does not exist

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Breaking the Circular Reference
23
Common for fixing most models referred to as Jump Starting the Model
First identify the source of the error
Then stop the error from flowing through the Income Statement

Free Cash Flow
Interest Expense
&
Interest Income
Revolver Balance
& Cash Balance
Net Income
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How to Jump Start
24
Copy interest expense/ income formulae on the Income Statement
Paste the formulae off to the right, beyond the last column on the worksheet

Delete the original interest expense/ income formulae and hard code using Zeros, thereby
breaking the Circular Reference

Copy interest expense/ income formulae back into the Income Statement

For Jump Starting
For Jump Starting
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Breaking the Circular Reference
25
A more sophisticated approach
Excellent for finding your errors
Solved the problem of embedded errors
Uses IF statement logic* to turn on and off circularity
Then stop the error from flowing through the Income Statement

* =IF(logical test, value if true, value if false)

Free Cash Flow
Interest Expense
&
Interest Income
Revolver Balance
& Cash Balance
Net Income
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Busting the Circular Reference
26
Name a cell Circular (Ctrl+F3, Alt IND)

Input a Zero in the cell name Circular to turn off circular reference
Adjust interest expense/ income on Income Statement
Add IF(Circular =0,0 to the existing formula

Free Cash Flow
Interest Expense
&
Interest Income
Revolver Balance
& Cash Balance
Net Income
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Busting the Circular Reference
27
Adjust Net Change in Cash on the Cash Flow
Add IF(Circular=0,0 to the existing formula

Free Cash Flow
Interest Expense
&
Interest Income
Revolver Balance
& Cash Balance
Net Income
Other common areas where the Circular
Buster is added to break circular logic
include:
- Debt Schedule
- Equity Schedule
- Tax Schedule

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Error Finding with Circular Buster
28
Input Circular = 0 (Zero) this switches off Circular Reference
Go through the Income statement and then the Balance Sheet
Look out for errors ONLY in line items as ratios are derived
Trace the first errors precedents (Short Cuts: Ctrl+[ OR Alt T U T )
Fix the first error
Repeat the process to locate more errors (Note, solve each error as you encounter them)
Input Circular = 1 this switches On Circular Reference

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Balancing the Model
29
Safety Check on the model

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Balancing the Model
30
Reconcile the change in each Balance Sheet line item with Flow of Funds on the
Cash Flow

Ending Balance on
Balance Sheet
Year 0
Ending Balance on
Balance Sheet
Year 1
Cash Flow
Year 1
=
Cash Flow
Year 0 Year 1 Difference Year 1
Cash 28.6 25.0 (3.6) (3.6)
Accounts Recievable, net 473.0 505.7 (32.7) (32.7)
Inventory 383.8 411.4 (27.7) (27.7)
Other Current Assets 83.5 92.3 (8.8) (8.8)
PP & E, net 965.6 1017.8 (52.2) (52.2)
Goodwill 424.3 454.3 (30.0) (30.0)
Deferred Income Taxes 120.3 120.3 0.0 0.0
Other Long Term Assets 108.6 108.6 0.0 0.0
Balance Sheet
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Balancing the Model Quick Checks
31
Quick sanity checks on Balance Sheet and Cash Flow
Wrong signs Capex on Cash Flow Statement, etc.
Unreasonable changes on the Balance Sheet
Divide error by 2
Usual to find out a sign error
Manual Checking
Print the model and check manually sometimes this helps!
Hunt the screen
Check if all the Schedules are linked properly to the key statements
Check formulae for Totals and others
Common Errors & Solutions

Error Possible Resons
Unstable Balances Reference to an incorrect year
Off by a small amount Check past information
Off by a constant amount Check for error in the first year out of parity
Off by a constant growing amount Possible omissions
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Balancing the Model Quick Checks
32
When parity check has phantom brackets

Intuitively: If Total Assets minus Total Liabilities plus Equity is less than 0.001, put in 0!
Use: =IF(ABS(H18-H33)<0.001, 0, (H18-H33))
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Is this model ready?
33

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Testing your Model
34
Is a Balanced Model a Correct Model?
Balanced Model Correct Model

Review your model by each line:
Are the assumptions reasonable & defensible?
Is everything properly formatted?
Have footnotes been provided where necessary?
Manually check all calculations if something looks wrong/ or in doubt
Remember that you would be responsible for each assumption and number in the model
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The Final Check
35
Check if the model is
Balanced?
Has correct references
OK with the manual checks
Assumptions behind the number are defensible
Story behind the numbers is clearly conveyed
File location is easy to access for all authorized people (check with internal file saving norms)
Time and date stamp the model
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Caveats
36
Issue of timing
Annual model ignores seasonality and assumes even cash flows throughout the year
Check the applicability of Quarterly, monthly or weekly models depending on requirements

Simple One Line revenue income statement
Over-simplified credit statistics
Purpose is DCF or Merger and NOT a debt offering
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Model Layout
37
Single Sheet - Vertical
Compact (eg; Merger Model)
Easy alignment of columns & headings
Tougher to navigate

Multiple Sheets - Horizontal
Readability is high (name individual tabs)
Easier to set up (standalone model, IPO)
Numerous Sheets

The choice of model has to be purpose driven
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Tweaking the Assumptions
38
Assumptions & Inputs
Are they reasonable?
Are they defensible?
Making notes of sources is always helpful
Reality Check
Match research or EPS expectations
5 year EPS CAGR
Incremental Impacts
Scenarios & Cases
Upside, management and base cases
Prepare detailed Revenue build-up
EPS growth rate adjustments
Check which variables can be adjusted to raise EPS growth rate over the forecast period
Start with top of the income statement line items and move down
Stress test the Share repurchase plans
Check the maximum number of shares that can be repurchased
Check for constraints:
No material borrowings on revolver
No material build up of excess cash

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Identifying the Key Drivers
39
Identify and isolate the drivers
Always remember to footnote and source as required
Forecasting requires Excel mechanics along with Accounting knowledge

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Are all models standardized?
40
One size does not fit all
Be sensitive to the Business model when modifying a Financial model
Study the new companys financial performance
Identify the line items (may be different from the existing model)
Design the flow of funds to suit the business (reference new line items to and from the core statements)
Do not delete anything in haste
Always trace precedents to check linkages (Alt T U D)
Data -> Group Rows -> Hide Detail (Alt D G, H)

TM

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MS Excel 2010 -
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