Types of Financial Model - Financial Modeling by EduCBA
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This document explains financial models as mathematical representations used to forecast a company's financial performance and assess various scenarios. It details several types of financial models, including discounted cash flow, merger & acquisition, comparative company analysis, leveraged buyout, option pricing, and sum-of-the-parts models. Each model serves specific purposes in valuation and investment analysis, tailored to different financial situations and objectives.
Types of Financial Model - Financial Modeling by EduCBA
- 1. Types of Financial Models ~ By edu CBA
- 2. 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.
- 3. Types of Financial Models Comparative Company Analysis model Sum-of-the-parts model Discounted Cash Flow Model Merger & Acquisition (M&A) model Leveraged Buy Out (LBO) model Option pricing model
- 4. 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.”
- 5. 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.
- 6. 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.
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