Modelling in Corporate Finance, Valuation and Markets

Module B of the CinFM


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Course Description

This 3-day course covers the key concepts and modelling approaches that are used in corporate finance, including valuation and financial statement modelling.

We initially provide an overview of general valuation approaches, before discussing each in more detail, and linking them to ratio analysis. We cover relative valuation (comparatives and multiples). We discuss equity and enterprise valuation, and the main steps to convert one to the other.

The discussion of annuity-based cash flow valuation covers single-stage terminal value approaches and multi-stage or phased approaches, and the associated formulae.

We cover a variety of ways to measure risk and return and the role of these in various applications. We cover the cost-of-capital, weighted cost of capital, as well as various approaches to account for leverage within these calculations. We also look at methods to analyse price-volume variance and the application to general business and to financial portfolio performance measurement.

The coverage of financial statement modelling begins with an introduction to financial statements and understanding the effect of individual transactions on them. We use a structured step-by-step process to create an integrated financial statement model from scratch. We discuss the options available to create a consistent, integrated set of statements, reconciliations and error-checking and correction techniques.

We close the course with a brief coverage of some generalisation and key aspects of further and related areas of practical applications. These include an introductory discussion of the adjusted present value method, the modelling of M&A transactions and project finance.

Learning Objectives


  • Learn core aspects of main approaches to modelling in corporate finance and valuation
  • Develop a set of competences and knowledge that is widely applicable
  • Understand the different approaches to valuation, and their application
  • Learn standard methods of valuation, as well as their assumptions, limitations and some more advanced approaches
  • Learn how to derive and use annuity formulae for single and multiple time periods
  • Enhance knowledge of financial concepts in return, risk, portfolio analysis and the cost of capital
  • Develop practical skills in valuing cash flows for equity and enterprise valuations
  • Learn different measures of risk, performance and portfolio valuation
  • Develop understanding of financial statements and the impact of typical business and financial transactions on the statements
  • Learn the key process steps to create an integrated financial statement forecasting model
  • Understand the key issues and choices available at each step, and approaches to deal with them
  • Conduct practical exercises to build an integrated financial statement model
  • Learn key approaches to test, check and correct the model e.g. to balance the balance sheet, integrate with cash flow statement or produce meaningful ratios
  • Learn some key aspects of related areas of application, such as merger modelling and project finance

Key Topics Overview


  • Valuation approaches · Multiples and relative valuation · Ratio analysis · Dupont analysis · Comparative company analysis · Enterprise and equity valuation
  • Cash flow annuity formulas · Terminal values · Multiple terminal value periods
  • Risk and return · Portfolio risk and return · Portfolio optimisation · Correlation · Rank correlation
  • Weighted cost of capital · Leveraged cost of capital · Capital Asset Pricing Model · Multi-factor models
  • Bond yield · Yield curve · Risk premium
  • Value-at-risk · Semi-deviation
  • Sharpe and Treynor ratios · Piotroski F-score
  • Variance analysis · Portfolio performance analysis
  • Financial statement transactions
  • Modelling integrated financial statements · Key Steps
  • Balancing the balance sheet · Circular references · Consistency checking
  • Generalisations
  • Adjusted Present Value
  • Introduction to M&A modelling
  • Introduction to project finance

 Course Agenda in Detail

Day 1: Introduction to Valuation, Risk and The Cost of Capital

1.1 Introduction to Valuation

  • Course overview and introduction
  • Introduction to valuation approaches (asset, multiples, cash flow)
  • Selecting consistent ratios
  • Hands-on exercises:
    • Relative valuation and multiples
    • Switching between equity and enterprise values
  • The time value of money; nominal and real terms
  • Annuity formula for a single terminal period
  • Hands-on exercises:
    • Assessment of valuation creation in future periods using explicit forecasts
    • Valuation of annuity cash flows
  • Value-driver formulae
  • Link annuity formulae to multiples and ratio analysis

1.2 Further Topics in Cash flow Valuation

  • Capturing growth, maturity and economic stability using multi-stage formulae
  • Hands-on exercises:
    • Creating multi-stage annuity formula for terminal values
  • Bonds, the yield curve, zero-coupon bonds and bootstrapping
  • Further calculations relating to financial instruments (e.g. default probabilities, credit rating, transition matrices, swaps, credit default swaps, risk premiums)
  • Hands-on exercises:
    • Valuation of cash flows using yield-curve based discounting

1.3 Risk, Return and Performance Expectations

  • Measuring risk and return
    • Measuring return (logarithmic and natural measures; simple or geometric averages)
    • Definition of risk and various measures (e.g. volatility, semi-deviation, value-at-risk)
  • Hands-on exercises:
    • Calculations of financial returns using various measures
    • Calculation of volatility and time-scaling
  • Portfolio theory and analysis
    • Return, risks, and the meaning and effect of correlation
    • Calculation of correlation coefficients (Pearson and Spearman Rank)
  • Hands-on exercises:
    • Portfolio risk and returns of correlated assets using matrix multiplication
    • Sensitivity analysis to correlation coefficients

1.4 The Cost of Capital, WACC and Leverage Effects

  • The Capital Asset Pricing Model (CAPM)
  • The weighted average cost of capital (WACC)
  • Hands-on exercises:
    • Calculation of cost-of-capital using CAPM (regression methods)
    • Confidence intervals for regression-based methods
    • Calculation of cost-of-capital using CAPM (bottom-up methods)
    • Leveraging and un-leveraging the cost-of-capital using standard approaches
  • Day 1 Recap, Q&A, Discussion, Close

Day 2: Further Topics in Valuation and Introduction to Financial Statement Modelling

2.1 Further Models for Risk and Return, and Portfolio Performance

  • Alternative measures of risk and its links to return expectations e.g.
    • Introduction to other models and discounting approaches (e.g. multi-factor models and Fama-French)
    • Further topics in ratio analysis (financial, operations and leverage; Dupont analysis)
    • Sharpe and Treynor ratios
    • Piotroski F-scores
  • Variance analysis for multiplicative processes
  • Hands-on exercise:
    • Decomposition of performance due to price-or-volume effects
    • Portfolio performance decomposition (e.g. Kaplan-Schweser)
    • Calculation of selected alternative risk and performance measures
    • Portfolio optimisation

2.2 Introduction to Modelling Financial Statements

  • Overview of key financial statements
  • Hands-on exercises:
    • Capturing the effect of various types of transactions on the financial statements
  • Step-by-step process to build an integrated financial statement model
    • Overview of steps
  • Issues to consider

2.3 Building an Integrated Financial Statement Model (I)

  • Hands-on exercise:
    • Model building from revenues to EBIT
    • Selected Income and Balance Sheet items

2.4 Building an Integrated Financial Statement Model (II)

  • Dealing with circular references: Approaches, implied assumptions, +/-s
  • Hands-on exercise:
    • Completion of Income, Balance Sheet and Cash Flow
    • Experimentation with methods to close the statements
  • Day 2 Recap, Q&A, Discussion, Close

Day 3: Further Topics in Financial Statement Modelling and Related Applications

3.1 Building an Integrated Financial Statement Model (III)

  • Introduction and recap
  • Key approaches and techniques to check and test the financial statement model
  • Hands-on exercises:
    • Sensitivity analysis
    • Linking financial statements to valuation and ratio analysis

3.2 Enhancing Functionality of a Financial Statement Model

  • Alternative methods for forecasting balance sheet items (e.g. depreciation; Excel functions for depreciation; triangle structures, working capital, financing structures, tax)
  • Hands-on exercise:
    • Producing direct and indirect forms of the cash flow statement
    • Adding additional line items or transactions to a completed model
    • Use of alternative forecasting methods for selected balance sheet items
    • Calculations of selected ratios for financial statement forecasting

3.3 Further Topics in Financial Statements and Valuation (I)

  • Limitations of standard formula to leverage/deleverage the cost of capital, and consequences for valuation
  • The Modigliani-Miller formulae and their implications for leveraged capital
  • The adjusted present value method (APV)
  • Hands-on exercise
    • Leveraging and deleveraging the cost of capital based on Modigliani-Miller
    • Using the APV method for valuation
  • Valuation adjustments linked to accounting issues (e.g. associates, minorities)

3.4 Further Topics in Financial Statements and Valuation (II)

  • Further modelling issues associated with financial statements and valuation
  • Overview of adjustments required for modelling mergers or acquisitions
  • Project finance, key ratios, and debt capacity
  • Hands-on exercises or demos of selected topics
  • Day 3 Recap, Q&A, Discussion, Course Close