This document discusses analyzing value with financial models. It explains that models are used to go from accounting statements to finance numbers needed for valuation. Specifically, free cash flow is used to determine valuation for major transactions. The document also mentions that modeling can be done in Excel, and financial analysis of accounting statements provides various perspectives including liquidity, commercial banking, activity, profitability, and growth. The overall goal is to clean accounting numbers, get to a finance number for valuation, and then take actions like modeling different strategic options to increase firm value.

1. Analyzing Value with Models
Finance
Michael Herlache MBA
Doctorate of Business Administration Candidate 2020
Analyzing Value with Models
Finance

2. Index
I. Analyzing Value
II. From Accounts to Models
III. Modeling
IV. Modeling in Excel
V. Analysis of Account Statements
Analyzing Value with Models
Finance

3. I. Analyzing Value
Strategics, financials, and entrepreneurs undertake investment with the expectation of
NPV & IRR. They accept projects that have positive NPV and IRR higher than the cost of
capital. They actively find and structure positive NPV projects and then match financial
products to them.
The positive NPV project is ideally a perpetuity with the value of the business being the
perpetuity value:
Perpetuity value = PMT / Discount rate
Calculating NPV & IRR is the main analytical work of finance.
*Growth statistic CAGR (Compound Annual Growth Rate) is yearly IRR
Analyzing Value with Models
Finance

4. II. From Accounts to Models
To go from accounts (accounting) to a finance number we use models. We
only use Free Cash Flow to determine valuation for major transactions in a
capitalist economy including restructuring, growth, M&A, and capital raising.
To go from account filings to models, we need to “clean the numbers”, “scrub
the financials”, “normalize the financials”. This amounts to recasting
accounts to get to a finance number. We try to get to a finance number to
get to a valuation. We get to a valuation to then take actions in a capitalist
economy.
*We want more add backs to get to a higher valuation
Analyzing Value with Models
Finance

5. III. Modeling
After getting valuation, we can then model the different actions we can
take in a capitalist economy to increase the valuation of the strategic,
financial or entrepreneurial firm.
Analyzing Value with Models
Finance

6. IV. Modeling in Excel
Just like our account statements, our models are built and exist in Excel
Analyzing Value with Models
Finance

7. V. Analysis of Account Statements
Analysis of account statements (ratio of analysis) has various uses
including from a liquidity perspective, commercial bank perspective,
activity perspective, profitability perspective, and growth perspective.
Ex. 4x-7x debt multiple for lending purposes
Analyzing Value with Models
Finance