Lecture 15-2 Building Financial Models Material

Transcript:Lecture 15-2 Building Financial Models Material:
Lecture 15-2 Building Financial Models Material for Lecture 15-2 Read Chapters 13 and 14 Lecture 15-2 Farm.xlsx Step 1: KOVs What question is to be answered? Net cash income? Cash flow? Change in net worth? Number of years to payoff? Something else as: NPV, B/C, IRR, EBIT Scenarios to analyze Financing, technology, machinery replacement Marketing strategies, etc. Risk ranking Step 2: Financial Statements Required Based on the purpose of the model what calculations are required? Net cash income – detailed income statement Sources of all receipts and expenses Usually an annual model Cash flow model – income and cash flow statements Details for cash outflows Requires a multi-year model NPV or Change in Net Worth – income, cash flow, and balance sheet Multi-year models Step 3: What is in an Income Statement? All sources of receipts Show receipts by enterprise and type (government, insurance, sales, etc. DO NOT include interest earned or outside income All sources of CASH expenses Show cash costs for each enterprise Show fixed costs in detail (taxes, insurance, etc) Show each interest expense, by loan Net cash income = receipts – expenses Step 4: Parts of a Cash Flow Statement All sources of cash inflows Start with beginning cash from t-1 Net cash income Interest earnings from cash reserves Total inflows of cash All sources of cash outflows Owner salary and bonus or dividends for corp. Income taxes, principal payments paid Down payments for machinery & livestock Total outflows of cash Ending cash = Inflows - Outflows Step 5: What is in the Balance Sheet? Assets Beginning cash January 1: IF (ending casht > 0) Land, machinery, livestock market values Total assets Liabilities Cash flow deficit loans: IF (ending casht <0) Liabilities for land, machinery, livestock Total liabilities Net worth = Assets - Liabilities Step 6: Important KOVs Net present value = -Beginning Net Worth + ∑( dividends or cash withdrawalst /(1+i)t) + [Ending Net WorthT / (1+i)t] P(Economic Success or NPV > 0) P(Ending Casht > 0) P(Net Cash Incomet > 0) P(Increasing Real Net Worth) P(Benefit to Cost Ratio > 1.0) Number of Years to Payoff Debt/Asset and many more Now ready to Build the Model Stochastic worksheet -- STOCH Gather historical data for all stochastic variables Develop forecasts of random variables Estimate parameters for alternative distributions and select the best dist. for each variable Determine whether multivariate or univariate Simulate the random variables