What is financial modeling and who uses financial models?

What is Financial Modeling? The term “Financial Modeling” encompasses anything related to finance on excel. A financial model is a living and breathing calculation with multiple historical financial values, mixed with prospective inputs to get you to any answer the analyst is seeking. Using excel you could create a financial budget, forecast a project cost, […]

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What is a non-recurring item?

A non-recurring item is a gain or loss found on a company’s income statement that is not expected to occur regularly. Examples of non-recurring items are litigation fees, write-offs of bad debt or worthless assets, employee-separation costs, and repair costs for damage caused by natural disasters. Analysts seeking to measure the sustainable profitability of a […]

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Industry Specific Multiples

Over the years, valuation experts have distinguished patterns in the selling price of businesses and financial ration of relevant groups. These patterns, industry specific multiples, determine the current value of a company. Industry specific multiples are the techniques that demonstrate what business is worth. To evaluate the estimate of the value of the business one […]

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What are the differences between the EV/EBIT, EV/EBITDA, and P/E multiples, and when would you use each one?

The EV/EBITDA multiple, also known as Enterprise Value/, is used in companies to value its fair market value; through the measurements of the companies finance and investment. It is an economic measure reflecting the worth of a company in an industry. EV is usually seen as a capital structure-neutral metric, so stock market investors use […]

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Terminal Value in a Discounted Cash Flow Approach

Terminal value is defined as the value of an investment at the end of a certain period, incorporating a specified rate of interest.  Calculating the terminal value uses the same formula as that for calculating compound interest:   TV = P x (1 + r)^(t)   Where: TV = the total amount P = the […]

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Introduction to Industry Analysis

The first step in the valuation process is to understand the industry in which the subject company operates. Sometimes it is obvious what industry the company operates in (e.g. a restaurant) and sometimes it is not so obvious (e.g. a headhunting firm). For example, the key to understanding the headhunting industry would involve the identification […]

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SWOT Analysis

SWOT is an industry analysis tool that helps the analyst identify Strengths, Weaknesses, Opportunities and Threats of a business or project within an industry. Strengths and Opportunities are the key to identifying comparative advantages within an organization, and Weakness and Threats stem from external pressure. This tool is often used by decision makers within a […]

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Modified Internal Rate of Return

The modified internal rate of return (MIRR), like the internal rate of return (IRR) is a measure of the return of an investment.  MIRR assumes that all projects’ cash flows are reinvested at the cost of capital of the company, while the regular IRR assumes that the cash flows are reinvested at the IRR of […]

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Mid-Year Discounting

A DCF (Discounted Cash Flow) analysis measures the cash flow in terms of its present value. The method of discounting cash flow at the end of a projected year is applied with the following formula:     Where: = discount rate or WACC =years in the future This formula presents issues because it discounts the […]

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The Weighted Average Cost of Capital (WACC)

The weighted average cost of capital is defined as measuring the cost of capital where each category of capital is proportionally weighted and taken into consideration. Examples of some of the capital sources that are included in the calculation are; common stock, preferred stock, bonds and any other long-term debt. An increase in the weighted […]

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