A B C

1 SETTING UP THE FINANCIAL STATEMENT MODEL

2 Sales growth 10%
3 Current assets/Sales 15%
4 Current liabilities/Sales 8%
5 Net fixed assets/Sales 77%
6 Costs of goods sold/Sales 50%
7 Depreciation rate 10%
8 Interest rate on debt 10.00%
9 Interest paid on cash and marketable securities 8.00%
10 Tax rate 40%
11 Dividend payout ratio 40%
12
13 Year 0 1
14 Income statement
15 Sales 1,000 1,100
16 Costs of goods sold (500) (550)
17 Interest payments on debt (32) (32)
18 Interest earned on cash and marketable securities 6 9
19 Depreciation (100) (117)
20 Profit before tax 374 410
21 Taxes (150) (164)
22 Profit after tax 225 246
23 Dividends (90) (98)
24 Retained earnings 135 148
25
26 Balance sheet
27 Cash and marketable securities 80 144
28 Current assets 150 165
29 Fixed assets
30 At cost 1,070 1,264
31 Depreciation (300) (417)
32 Net fixed assets 770 847
33 Total assets 1,000 1,156
34
35 Current liabilities 80 88
36 Debt 320 320
37 Stock 450 450
38 Accumulated retained earnings 150 298
39 Total liabilities and equity 1,000 1,156
 D
AL STATEMENT
1 MODEL
2
3
4
5
6
7
8
9
10
11
12
13
14
15 #VALUE!
16 #VALUE!
17 #VALUE!
18 #VALUE!
19 #VALUE!
20 #VALUE!
21 #VALUE!
22 #VALUE!
23 #VALUE!
24 #VALUE!
25
26
27 #VALUE!
28 #VALUE!
29
30 #VALUE!
31 #VALUE!
32 #VALUE!
33 #VALUE!
34
35 #VALUE!
36 #VALUE!
37 #VALUE!
38 #VALUE!
39 #VALUE!
 A B C D E
1 FIRST FINANCIAL MODEL
2 Sales growth 10%
3 Current assets/Sales 15%
4 Current liabilities/Sales 8%
5 Net fixed assets/Sales 77%
6 Costs of goods sold/Sales 50%
7 Depreciation rate 10%
8 Interest rate on debt 10.00%
9 Interest paid on cash and marketable securities 8.00%
10 Tax rate 40%
11 Dividend payout ratio 40%
12
13 Year 0 1 2 3
14 Income statement
15 Sales 1,000 1,100 1,210 1,331
16 Costs of goods sold (500) (550) (605) (666)
17 Interest payments on debt (32) (32) (32) (32)
18 Interest earned on cash and marketable securities 6 9 14 20
19 Depreciation (100) (117) (137) (161)
20 Profit before tax 374 410 450 492
21 Taxes (150) (164) (180) (197)
22 Profit after tax 225 246 270 295
23 Dividends (90) (98) (108) (118)
24 Retained earnings 135 148 162 177
25
26 Balance sheet
27 Cash and marketable securities 80 144 213 289
28 Current assets 150 165 182 200
29 Fixed assets
30 At cost 1,070 1,264 1,486 1,740
31 Depreciation (300) (417) (554) (715)
32 Net fixed assets 770 847 932 1,025
33 Total assets 1,000 1,156 1,326 1,513
34
35 Current liabilities 80 88 97 106
36 Debt 320 320 320 320
37 Stock 450 450 450 450
38 Accumulated retained earnings 150 298 460 637
39 Total liabilities and equity 1,000 1,156 1,326 1,513
40
41
42 Year 0 1 2 3
43 Free cash flow calculation
44 Profit after tax 246 270 295
45 Add back depreciation 117 137 161
46 Subtract increase in current assets (15) (17) (18)
47 Add back increase in current liabilities 8 9 10
48 Subtract increase in fixed assets at cost (194) (222) (254)
49 Add back after-tax interest on debt 19 19 19
 A B C D E
50 Subtract after-tax interest on cash and+A14 mkt. securities (5) (9) (12)
51 Free cash flow 176 188 201
52
53 CONSOLIDATED STATEMENT OF CASH FLOWS: RECONCILING THE CASH
54 Cash flow from operating activities
55 Profit after tax 246 270 295
56 Add back depreciation 117 137 161
57 Adjust for changes in net working capital:
58 Subtract increase in current assets (15) (17) (18)
59 Add back increase in current liabilities 8 9 10
60 Net cash from operating activities 356 400 448
61
62 Cash flow from investing activities
63 Aquisitions of fixed assets--capital expenditures (194) (222) (254)
64 Purchases of investment securities 0 0 0
65 Proceeds from sales of investment securities 0 0 0
66 Net cash used in investing activities (194) (222) (254)
67
68 Cash flow from financing activities
69 Net proceeds from borrowing activities 0 0 0
70 Net proceeds from stock issues, repurchases 0 0 0
71 Dividends paid (98) (108) (118)
72 Net cash from financing activities (98) (108) (118)
73
74 Net increase in cash and cash equivalents 64 70 76
75 Check: changes in cash and mkt. securities 64 70 76
 F G H
1
2
3
4
5
6
7
8
9
10
11
12
13 4 5
14
15 1,464 1,611 #VALUE!
16 (732) (805) #VALUE!
17 (32) (32) #VALUE!
18 26 33 #VALUE!
19 (189) (220) #VALUE!
20 538 587 #VALUE!
21 (215) (235) #VALUE!
22 323 352 #VALUE!
23 (129) (141) #VALUE!
24 194 211 #VALUE!
25
26
27 371 459 #VALUE!
28 220 242 #VALUE!
29
30 2,031 2,364 #VALUE!
31 (904) (1,124) #VALUE!
32 1,127 1,240 #VALUE!
33 1,718 1,941 #VALUE!
34
35 117 129 #VALUE!
36 320 320 #VALUE!
37 450 450 #VALUE!
38 830 1,042 #VALUE!
39 1,718 1,941 #VALUE!
40
41
42 4 5
43
44 323 352 #VALUE!
45 189 220 #VALUE!
46 (20) (22) #VALUE!
47 11 12 #VALUE!
48 (291) (333) #VALUE!
49 19 19 #VALUE!
 F G H
50 (16) (20) #VALUE!
51 214 228 #VALUE!
52
S: RECONCILING
53 THE CASH BALANCES
54
55 323 352 #VALUE!
56 189 220 #VALUE!
57
58 (20) (22) #VALUE!
59 11 12 #VALUE!
60 502 562 #VALUE!
61
62
63 (291) (333) #VALUE!
64 0 0 <-- Not in our model
65 0 0 <-- Not in our model
66 (291) (333) #VALUE!
67
68
69 0 0 #VALUE!
70 0 0 #VALUE!
71 (129) (141) #VALUE!
72 (129) (141) #VALUE!
73
74 82 88 #VALUE!
75 82 88 #VALUE!
 A B C D E F G H I J K
1 FIRST FINANCIAL MODEL
2 Sales growth 10%
3 Current assets/Sales 15%
4 Current liabilities/Sales 8%
5 Net fixed assets/Sales 77%
6 Costs of goods sold/Sales 50%
7 Depreciation rate 10%
8 Interest rate on debt 10.00%
9 Interest paid on cash and marketable securities 8.00%
10 Tax rate 40%
11 Dividend payout ratio 40%
12
13 Year 0 1 2 3 4 5
14 Income statement
15 Sales 1,000 1,160 1,100 1,210 1,331 1,464
16 Costs of goods sold (500) (580) (550) (605) (666) (732)
17 Interest payments on debt (32) (32) (32) (32) (32) (32)
18 Interest earned on cash and marketable securities 6 12 20 25 30 37
19 Depreciation (100) (113) (129) (151) (176) (205)
20 Profit before tax 374 367 409 447 488 532
21 Taxes (150) (147) (164) (179) (195) (213)
22 Profit after tax 225 220 245 268 293 319
23 Dividends (90) (88) (98) (107) (117) (128)
24 Retained earnings 135 132 147 161 176 192
25
26 Balance sheet
27 Cash and marketable securities 80 212 275 344 418 498
28 Current assets 150 174 165 182 200 220
29 Fixed assets
30 At cost 1,070 1,183 1,388 1,623 1,892 2,199
31 Depreciation (300) (413) (541) (692) (868) (1,072)
32 Net fixed assets 770 770 847 932 1,025 1,127
33 Total assets 1,000 1,156 1,287 1,457 1,643 1,845
34
35 Current liabilities 80 93 88 97 106 117
36 Debt 320 320 320 320 320 320
37 Stock 450 450 450 450 450 450
38 Accumulated retained earnings 150 282 429 590 766 958
39 Total liabilities and equity 1,000 1,132 1,287 1,457 1,643 1,845
40
41 Year 0 1 2 3 4 5
42 Free cash flow calculation
43 Profit after tax 220 245 268 293 319
44 Add back depreciation 113 129 151 176 205
45 Subtract increase in current assets 0 (15) (17) (18) (20)
46 Add back increase in current liabilities 0 8 9 10 11
47 Subtract increase in fixed assets at cost (113) (206) (235) (269) (307)
48 Add back after-tax interest on debt 19 19 19 19 19
49 Subtract after-tax interest on cash and mkt. securities (7) (12) (15) (18) (22)
50 Free cash flow 232 169 180 192 205
51
52
53 Valuing the firm
54 Weighted average cost of capital 20%
55 Long-term free cash flow growth rate 5% <-- real growth 2% + inflation 3%?
56
57 Year 0 1 2 3 4 5
58 FCF 232 169 180 192 205
59 Terminal value 1,433 #VALUE!
60 Total 232 169 180 192 1,637
61
62 Enterprise value, present value of row 60 1,166 #VALUE!
63 Add in initial (year 0) cash and mkt. securities 80 #VALUE!
64 Asset value in year 0 1,246 #VALUE!
65 Subtract out value of firm's debt today (320) #VALUE!
66 Equity value 926 #VALUE!
67
68 Cash and marketable securities as negative debt
69 NPV of row 60 = enterprise value 1,166 #VALUE!
70 Net year 0 debt: debt minus cash (240) #VALUE!
71 Equity value 926 #VALUE!
72
73
74 Valuing the firm--using mid-year discounting
75 Weighted average cost of capital 20%
76 Long-term free cash flow growth rate 5%
77
78 Year 0 1 2 3 4 5
79 FCF 232 169 180 192 205
80 Terminal value 1,433 #VALUE!
81 Total 232 169 180 192 1,637
82
83 Enterprise value, NPV of row 81 1,277 #VALUE!
84 Add in initial (year 0) cash and mkt. securities 80 #VALUE!
85 Asset value in year 0 1,357 #VALUE!
86 Subtract out value of firm's debt today (320) #VALUE!
87 Equity value 1,037 #VALUE!
88
89
90 Data table: The effect of sales growth (cell B2) on equity valuation
91 Growth 1,037 #VALUE!
92 0% 1,037
Equity value

93 2% 1,037 1,120 Sales Growth and Equity Value

94 4% 1,037
1,110
95 6% 1,037
96 8% 1,037 1,100

97 10% 1,037 1,090

98 12% 1,037 1,080
99 14% 1,037
1,070
100 16% 1,037
101 1,060

102 1,050
103 1,040
104 0% 2% 4% 6% 8% 10% 12% 14% 16%
Sales growth
105
106
107 WACC ¯
108 =IF(B75<=B76,"nmf",B87) 1,037.26 10% 12% 14% 16% 18% 20% 22% 24% 26%
109 0% 1,873.85 1,534.25 1,292.01 1,110.57 969.64 857.05 765.05 688.49 623.77
110 Long-term FCF growth rate --> 2% 2,240.39 1,763.68 1,446.04 1,219.27 1,049.28 917.12 811.44 725.00 652.99
111 4% 2,851.29 2,107.82 1,661.68 1,364.21 1,151.67 992.21 868.13 768.82 687.52
112 6% 4,073.09 2,681.38 1,985.15 1,567.11 1,288.18 1,088.75 939.00 822.38 728.95
113 8% 7,738.48 3,828.51 2,524.26 1,871.48 1,479.31 1,217.47 1,030.11 889.32 779.59
114 10% nmf 7,269.88 3,602.48 2,378.75 1,766.00 1,397.67 1,151.59 975.39 842.89
115 12% nmf nmf 6,837.14 3,393.29 2,243.81 1,667.98 1,321.67 1,090.15 924.27
116 14% nmf nmf nmf 6,436.93 3,199.43 2,118.50 1,576.78 1,250.82 1,032.78
117 16% nmf nmf nmf nmf 6,066.30 3,019.53 2,001.98 1,491.82 1,184.70
 A B C D E
1 NEGATIVE CASH BALANCES: ILLUSTRATION
2 Sales growth 20% <-- Increased from 10%
3 Current assets/Sales 20% <-- Increased from 15%
4 Current liabilities/Sales 8%
5 Net fixed assets/Sales 80% <-- Increased from 77%
6 Costs of goods sold/Sales 50%
7 Depreciation rate 10%
8 Interest rate on debt 10.00%
9 Interest paid on cash and marketable securities 8.00%
10 Tax rate 40%
11 Dividend payout ratio 50% <-- Increased from 40%
12
13 Year 0 1 2 3
14 Income statement
15 Sales 1,000 1,200 1,440 1,728
16 Costs of goods sold (500) (600) (720) (864)
17 Interest payments on debt (40) (40) (40) (40)
18 Interest earned on cash and marketable securities 6 4 (0) (6)
19 Depreciation (100) (124) (156) (194)
20 Profit before tax 366 440 524 624
21 Taxes (147) (176) (210) (249)
22 Profit after tax 220 264 314 374
23 Dividends (110) (132) (157) (187)
24 Retained earnings 110 132 157 187
25
26 Balance sheet
27 Cash and marketable securities 80 28 (36) (113)
28 Current assets 200 240 288 346
29 Fixed assets
30 At cost 1,100 1,384 1,732 2,157
31 Depreciation (300) (424) (580) (774)
32 Net fixed assets 800 960 1,152 1,382
33 Total assets 1,080 1,228 1,404 1,615
34
35 Current liabilities 80 96 115 138
36 Debt 400 400 400 400
37 Stock 450 450 450 450
38 Accumulated retained earnings 150 282 439 626
39 Total liabilities and equity 1,080 1,228 1,404 1,615
40
41 Year 0 1 2 3
42 Free cash flow calculation
43 Profit after tax 264 314 374
44 Add back depreciation 124 156 194
45 Subtract increase in current assets (40) (48) (58)
46 Add back increase in current liabilities 16 19 23
47 Subtract increase in fixed assets at cost (284) (348) (425)
48 Add back after-tax interest on debt 24 24 24
49 Subtract after-tax interest on cash and mkt. securities (3) 0 4
 A B C D E
50 Free cash flow 101 118 137
 F G
TRATION 1
2
3
4
5
6
7
8
9
10
11
12
13 4 5
14
15 2,074 2,488
16 (1,037) (1,244)
17 (40) (40)
18 (13) (21)
19 (242) (299)
20 742 884
21 (297) (354)
22 445 530
23 (223) (265)
24 223 265
25
26
27 (209) (325)
28 415 498
29
30 2,675 3,306
31 (1,016) (1,315)
32 1,659 1,991
33 1,865 2,163
34
35 166 199
36 400 400
37 450 450
38 849 1,114
39 1,865 2,163
40
41 4 5
42
43 445 530
44 242 299
45 (69) (83)
46 28 33
47 (518) (631)
48 24 24
49 8 13
 F G
50 159 186
 A B C D E
1 NO NEGATIVE CASH BALANCES
2 Sales growth 20% <-- Increased from 10%
3 Current assets/Sales 20% <-- Increased from 15%
4 Current liabilities/Sales 8%
5 Net fixed assets/Sales 80% <-- Increased from 77%
6 Costs of goods sold/Sales 50%
7 Depreciation rate 10%
8 Interest rate on debt 10.00%
9 Interest paid on cash and marketable securities 8.00%
10 Tax rate 40%
11 Dividend payout ratio 50% <-- Increased from 40%
12
13 Year 0 1 2 3
14 Income statement
15 Sales 1,000 1,200 1,440 1,728
16 Costs of goods sold (500) (600) (720) (864)
17 Interest payments on debt (40) (40) (42) (47)
18 Interest earned on cash and marketable securities 6 4 1 -
19 Depreciation (100) (124) (156) (194)
20 Profit before tax 366 440 524 622
21 Taxes (147) (176) (209) (249)
22 Profit after tax 220 264 314 373
23 Dividends (110) (132) (157) (187)
24 Retained earnings 110 132 157 187
25
26 Balance sheet
27 Cash and marketable securities 80 28 0 0
28 Current assets 200 240 288 346
29 Fixed assets
30 At cost 1,100 1,384 1,732 2,157
31 Depreciation (300) (424) (580) (774)
32 Net fixed assets 800 960 1,152 1,382
33 Total assets 1,080 1,228 1,440 1,728
34
35 Current liabilities 80 96 115 138
36 Debt 400 400 436 514
37 Stock 450 450 450 450
38 Accumulated retained earnings 150 282 439 626
39 Total liabilities and equity 1,080 1,228 1,440 1,728
40
41 Year 0 1 2 3
42 Free cash flow calculation
43 Profit after tax 264 314 373
44 Add back depreciation 124 156 194
45 Subtract increase in current assets (40) (48) (58)
46 Add back increase in current liabilities 16 19 23
47 Subtract increase in fixed assets at cost (284) (348) (425)
48 Add back after-tax interest on debt 24 25 28
49 Subtract after-tax interest on cash and mkt. securities (3) (1) 0
 A B C D E
50 Free cash flow 101 118 137
 F G H
CASH BALANCES
1
2
3
4
5
6
7
8
9
10
11
12
13 4 5
14
15 2,074 2,488
16 (1,037) (1,244)
17 (56) (67)
18 - -
19 (242) (299)
20 739 878
21 (296) (351)
22 443 527
23 (222) (263)
24 222 263
25
26
27 0 0 #VALUE!
28 415 498
29
30 2,675 3,306
31 (1,016) (1,315)
32 1,659 1,991
33 2,074 2,488
34
35 166 199
36 610 728 #VALUE!
37 450 450
38 847 1,111
39 2,074 2,488
40
41 4 5
42
43 443 527
44 242 299
45 (69) (83)
46 28 33
47 (518) (631)
48 34 40
49 0 0
 F G H
50 159 186
 A B C D E

1
TARGET DEBT-EQUITY RATIO
Cash is fixed, ratio of debt/equity changes in each year
2 Sales growth 10%
3 Current assets/Sales 15%
4 Current liabilities/Sales 8%
5 Net fixed assets/Sales 77%
6 Costs of goods sold/Sales 50%
7 Depreciation rate 10%
8 Interest rate on debt 10.00%
9 Interest paid on cash & marketable securities 8.00%
10 Tax rate 40%
11 Dividend payout ratio 60%
12
13 Year 0 1 2 3
14 Income statement
15 Sales 1,000 1,100 1,210 1,331
16 Costs of goods sold (500) (550) (605) (666)
17 Interest payments on debt (32) (30) (29) (28)
18 Interest earned on cash & marketable securities 6 6 6 6
19 Depreciation (100) (117) (137) (161)
20 Profit before tax 374 409 445 483
21 Taxes (150) (164) (178) (193)
22 Profit after tax 225 246 267 290
23 Dividends (135) (147) (160) (174)
24 Retained earnings 90 98 107 116
25
26 Balance sheet
27 Cash and marketable securities 80 80 80 80
28 Current assets 150 165 182 200
29 Fixed assets
30 At cost 1,070 1,264 1,486 1,740
31 Depreciation (300) (417) (554) (715)
32 Net fixed assets 770 847 932 1,025
33 Total assets 1,000 1,092 1,193 1,305
34
35 Current liabilities 80 88 97 106
36 Debt 320 287 284 276
37 Stock 450 469 457 451
Initial (year 0)
38 Accumulated retained earnings 150 248 355 471
debt/equity ratio:
39 Total liabilities and equity =B36/(B37+B38) 1,000 1,092 1,193 1,305
40
41 Target debt-equity ratio 0.53 0.40 0.35 0.30
42
43 Year 0 1 2 3
44 Free cash flow calculation
45 Profit after tax 246 267 290
46 Add back depreciation 117 137 161
47 Subtract increase in current assets (15) (17) (18)
 A B C D E
48 Add back increase in current liabilities 8 9 10
49 Subtract increase in fixed assets at cost (194) (222) (254)
50 Add back after-tax interest on debt 18 17 17
51 Subtract after-tax interest on cash & mkt. securities (4) (4) (4)
52 Free cash flow 176 188 201
 F G H
TY RATIO 1
changes in each year
2
3
4
5
6
7
8
9
10
11
12
13 4 5
14
15 1,464 1,611
16 (732) (805)
17 (29) (32)
18 6 6
19 (189) (220)
20 521 560
21 (208) (224)
22 313 336
23 (188) (202)
24 125 134
25
26
27 80 80
28 220 242
29
30 2,031 2,364
31 (904) (1,124)
32 1,127 1,240
33 1,427 1,562
34
35 117 129
36 302 331 #VALUE!
37 412 372 #VALUE!
38 596 730
39 1,427 1,562
40
41 0.30 0.30
42
43 4 5
44
45 313 336
46 189 220
47 (20) (22)
 F G H
48 11 12
49 (291) (333)
50 17 19
51 (4) (4)
52 214 228
 A B C D E

1
PROJECT FINANCE
No dividends, debt repayment schedule fixed, net fixed assets const
2 Sales growth 15%
3 Current assets/Sales 15%
4 Current liabilities/Sales 8%
5 Costs of goods sold/Sales 45%
6 Depreciation rate 10%
7 Interest rate on debt 10.00%
8 Interest paid on cash and marketable securities 8.00%
9 Tax rate 40%
10 Dividend payout ratio 0% <-- No dividends until all the debt is paid off
11
12 Year 0 1 2 3
13 Income statement
14 Sales 1,150 1,323 1,521
15 Costs of goods sold (518) (595) (684)
16 Interest payments on debt (171) (7) (5)
17 Interest earned on cash and marketable securities 10 31 56
18 Depreciation (211) (233) (257)
19 Profit before tax 423 519 631
20 Taxes (169) (208) (252)
21 Profit after tax 254 311 378
22 Dividends 0 0 0
23 Retained earnings 254 311 378
24
25 Balance sheet
26 Cash and marketable securities 0 253 533 877
27 Current assets 200 173 198 228
28 Fixed assets
29 At cost 2,000 2,211 2,443 2,700
30 Depreciation 0 (211) (443) (700)
31 Net fixed assets 2,000 2,000 2,000 2,000
32 Total assets 2,200 2,426 2,731 3,105
33
34 Current liabilities 100 92 106 122
35 Debt 1,900 1,520 60 40
36 Stock 1,100 200 2,000 2,000
37 Accumulated retained earnings 0 254 565 944
38 Total liabilities and equity 3,100 2,426 2,731 3,105
39
40
41 FREE CASH FLOW CALCULATION
42 Year 0 1 2 3
43 Profit after tax 254 311 378
44 Add back depreciation 211 233 257
45 Subtract increase in current assets 28 (26) (30)
46 Add back increase in current liabilities (8) 14 16
47 Subtract increase in fixed assets at cost (211) (233) (257)
 A B C D E
48 Add back after-tax interest on debt 103 4 3
49 Subtract after-tax interest on cash and mkt. securities (6) (19) (34)
50 Free cash flow 370 285 334
51
52
53
54
55
56 RETURN ON EQUITY (ROE)
57 Year 0 1 2 3
58 Equity cash flow -200 - - -
59 RETURN ON EQUITY (ROE) 14.65% <-- =IRR(B59:G59)
60
61
62 Data table: ROE as a function of initial 14.65% <-- =B60&" , table header"
63 equity investment 2,000 14.65%
64 1,800 14.65% ROE as
65 1,600 14.65% Eq
66 1,400 14.65% 20.00%

ROE
67 1,200 14.65% 15.00%
68 1,000 14.65% 10.00%
69 800 14.65%
5.00%
70 600 14.65%
400 14.65%
0.00%
71
0 0 0 0
20 40 60
72 200 14.65%
73 E
74
 F G H I J

NANCE 1
fixed, net fixed assets constant
2
3
4
5
6
7
8
9
s until all the debt
10 is paid off
11
12 4 5
13
14 1,749 2,011
15 (787) (905)
16 (3) (1)
17 87 125
18 (284) (314)
19 762 916
20 (305) (358)
21 457 557
22 0 0
23 457 557
24
25
26 1,298 1,817 #VALUE!
27 262 302
28
29 2,985 3,299
30 (985) (1,299) #VALUE!
31 2,000 2,000 <-- NFA don't change
32 3,561 4,119
33
34 140 161
35 20 0 #VALUE!
36 2,000 2,000
37 1,401 1,958
38 3,561 4,119
39
40
41
42 4 5
43 457 557
44 284 314
45 (34) (39) Cash flow generated
18 21 by depreciation
46
equals capital
47 (284) (314)
expenditures.
 Cash flow generated
by depreciation
equals capital
F G H
expenditures. I J
48 2 1
49 (52) (75)
50 391 465
51
52
53
54
55
56
57 4 5
58 - 3,958 <-- =G23+G37+G38
59
60
61
=B60&" , table 62
header"
63
64 ROE as a Function of Initial
65 Equity Investment
20.00%66
ROE

15.00%67
10.00%68
69
5.00%
70
0.00%
71
720 0 0 0 0 0 0 0 0 0 0
20 40 60 80 ,00 ,20 ,40 ,60 ,80 ,00
73 1 1 1
Equity investment 1 1 2
74
 A B C D E
1 COMPUTING THE ROE IN THE FIRST FINANCIAL MODEL
2 Sales growth 10%
3 Current assets/Sales 15%
4 Current liabilities/Sales 8%
5 Net fixed assets/Sales 77%
6 Costs of goods sold/Sales 50%
7 Depreciation rate 10%
8 Interest rate on debt 10.00%
9 Interest paid on cash and marketable securities 8.00%
10 Tax rate 40%
11 Dividend payout ratio 40%
12
13 Year 0 1 2 3
14 Income statement
15 Sales 1,000 1,100 1,210 1,331
51
52
53 Valuing the firm (mid-year discounting)
54 Weighted average cost of capital 20%
55 Long-term free cash flow growth rate 5%
56
57 Year 0 1 2 3
58 FCF 176 188 201
59 Terminal value
60 Total 176 188 201
61
62 Enterprise value, NPV of row 60 1,348 #VALUE!
63 Add in initial (year 0) cash and mkt. securities 80 #VALUE!
64 Asset value, year 0 1,428 #VALUE!
65 Subtract out value of firm's debt today (320) #VALUE!
66 Equity value 1,108 #VALUE!
67
68
69 RETURN ON EQUITY (ROE)
70 Year 0 1 2 3
71 Projected dividends (1,108) 98 108 118
72 Anticipated equity value, year 5
73 Equity cash flow (1,108) 98 108 118
74 RETURN ON EQUITY (ROE) 18.29% #VALUE!
 F G H
NCIAL MODEL
1
2
3
4
5
6
7
8
9
10
11
12
13 4 5
14
15 1,464 1,611
51
52
53
54
55
56
57 4 5
58 214 228
59 1,598 #VALUE!
60 214 1,826
61
62
63
64
65
66
67
68
69
70 4 5
71 129 141
72 1,737 <-- Terminal value + year 5 cash - year 5 debt
73 129 1,878 #VALUE!
74