Book Image

Hands-On Financial Modeling with Excel for Microsoft 365 - Second Edition

By : Shmuel Oluwa
Book Image

Hands-On Financial Modeling with Excel for Microsoft 365 - Second Edition

By: Shmuel Oluwa

Overview of this book

Financial modeling is a core skill required by anyone who wants to build a career in finance. Hands-On Financial Modeling with Excel for Microsoft 365 explores financial modeling terminologies with the help of Excel. Starting with the key concepts of Excel, such as formulas and functions, this updated second edition will help you to learn all about referencing frameworks and other advanced components for building financial models. As you proceed, you'll explore the advantages of Power Query, learn how to prepare a 3-statement model, inspect your financial projects, build assumptions, and analyze historical data to develop data-driven models and functional growth drivers. Next, you'll learn how to deal with iterations and provide graphical representations of ratios, before covering best practices for effective model testing. Later, you'll discover how to build a model to extract a statement of comprehensive income and financial position, and understand capital budgeting with the help of end-to-end case studies. By the end of this financial modeling Excel book, you'll have examined data from various use cases and have developed the skills you need to build financial models to extract the information required to make informed business decisions.
Table of Contents (19 chapters)
1
Part 1 – Financial Modeling Overview
4
Part 2 – The Use of Excel Features and Functions for Financial Modeling
8
Part 3 – Building an Integrated 3-Statement Financial Model with Valuation by DCF
15
Part 4 – Case Study

Creating a simple Monte Carlo simulation model

Monte Carlo simulation is a model that calculates probabilities of different results in a process where there is much inherent uncertainty. The model makes use of randomly generated numbers to obtain thousands of possible results from which a most likely outcome can be deduced. We will look at growth in free cash flow, FCFF, as well as the cost of capital and WACC, which are both integral parts of our DCF model.

FCFF Growth rates can be calculated using the following formula:

Here are the steps to create a simple Monte Carlo simulation model:

  1. Calculate the FCFF growth rates for the historical years Y02 to Y05.

Figure 11.45 – FCFF growth rates 02 to 05

Usually, a Monte Carlo simulation uses thousands of repetitions. However, for illustration purposes, we will limit the number to 100.

  1. Take the average of FCFF historical growth to arrive at the (historical)...