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The purpose of the Business Analysis and Valuation Model (hereafter, the “BAV Model”) is to aid users in
analyzing and valuing any company with at least two years of historical financial statement data. Table 1
below provides a brief overview of the 14 worksheets that comprise the BAV Model. A detailed review of each
worksheet and accompanying instructions follow in the Worksheet Instructions section.

Table 1. BAV Model Worksheets

Worksheet Title Function

Overview and Instructions To provide an overview of the structure and functionality of the BAV
Model, as well as specific worksheet instructions.

Imported Income Statement Because firms use different nomenclature and reporting structures in
Imported Balance Sheet their financial statements, it is necessary to standardize a firm’s
Imported Statement of Cash Flows historical financial statements. This is achieved by importing the
historical financial statements into the BAV Model, and completing a
financial statement line-item classification process.

Classification Lookup Provides help in the line-item classification process using examples of
financial statement line-items that are commonly found under a given
classification heading.

Standardized Financial Statements Standardized financial statements are the result of the line-item
classification process and serve as the foundation for subsequent
accounting and financial statement analysis.

Accounting Adjustments Accounting adjustments allow you to tailor a firm’s standardized

financial statements to reflect any adjustments that are warranted.

BAV Identities The BAV Identities worksheet defines the income statement and
balance sheet identities that comprise the Condensed Financial

Condensed Financial Statements The Condensed Financial Statements serve as the foundation for the
pro forma financial statements.

Ratio Analysis The Ratio Analysis worksheet provides a detailed breakdown of ratios
used in evaluating profitability and operating, investment, and
financial management. Ratio analysis can aid in both better
understanding the historical performance of the firm and in evaluating
the reasonableness of your Key Assumption inputs.

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Key Assumptions The Key Assumptions worksheet allows you to set forth your
expectations for the firm’s performance throughout the forecast

Performance Charts The Performance Charts worksheet provides a visual reference for
comparing the firm’s projected performance to both its historical
performance and to the historical performance for comparable U.S.

Pro Formas & Valuation The Pro Formas & Valuation worksheet provides forecasted financial
statements (based on the Condensed Financial Statements and your
Key Assumption inputs) and demonstrates valuation under the
Discounted Cash Flows, Abnormal Earnings, and Abnormal Returns
valuation approaches.

Valuation Summary The Valuation Summary worksheet reports the valuation results, the
net effect of selected accounting adjustments, and restates the key
assumptions underlying the valuation results.

Important Technical Reminders

1. File Saving Protocol
The BAV Model is distributed as an Excel template, denoted by the “.xlt” file name extension. When a
template file is first opened, Excel automatically modifies the template file’s name and replaces the “.xlt”
extension with the standard “.xls” extension (e.g., a template named “BAV Model.xlt” when opened would be
named “BAV Model.xls” automatically). This preserves the template in its original condition. Once the
template is opened, you can re-name the file (select File | Save As | (new name)), and save it to a desired
location on your computer. Given Excel’s default handling of template files, the original version of the BAV
Model will always be available under the distributed template file name.

2. Use of Macros and Excel Security Level Settings

The BAV Model makes extensive use of macros. For these macros to be operational, your Excel security level
must be set to ‘medium’, and you must select the ‘enable macros’ button when the workbook is first opened.
To check/adjust your security level, select Tools>Macros>Security> Medium (level). If your security level is
set to ‘high’, the workbook will not operate correctly.

3. Opening Multiple Copies of the Model Simultaneously

In order to open multiple copies of the model at the same time, each copy must be opened in a separate instance
of Microsoft Excel (i.e., start Excel from the Start menu, then use File>Open…to open each copy of the model).
Excel allocates a fixed amount of memory for each instance and multiple copies of the model can easily require
more memory than allocated by a single Excel instance, resulting in ‘Out of System Resources’ errors.

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4. Providing Feedback in the Event of a Technical Error
In the event that you encounter a technical error in the process of using the BAV Model, please let us know by
visiting this website for support information: http://www.hbs.edu/it/bav/. Please include a brief description of
the error, and specify the operating system (e.g., Windows 2000, Windows XP), version of Excel (e.g., 2000,
XP, 2003), and BAV Model version number you are working with (e.g., BAV Model v.4.0). To identify your
BAV version, go to the ‘BAV Navigator’ menu and select ‘About BAV Model’.

Basic Steps in Using the BAV Model

There are five primary steps in using the BAV Model:

Step 1:
Complete the Initial Setup.

Step 2:
Import historical income statement, balance sheet, and statement of cash flow data for the company you wish to
value into the worksheets titled “Imported Income Statement”, “Imported Balance Sheet”, and “Imported
Statement of Cash Flows”, respectively.

Step 3:
Recast the imported data from step 1 into a standardized format shown in the Standardized Financial Statements
worksheet. This is accomplished by completing the line-item classification process (described below) for each
of the imported financial statements.

Step 4:
Make any accounting adjustments that are warranted.

Step 5:
Input assumptions regarding the company’s future performance in the Key Assumptions worksheet.

In version 4.0 of the BAV Model, the availability of the Compustat WRDS download feature automatically
completes Steps 1-3 for authorized Compustat WRDS users.

Sources of Guidance and Instructions

The BAV Model provides you with a number of guides to help navigate your way through each of the required
steps. Guidance may be obtained from any of the following sources:

1. Instructions
A complete set of instructions are provided in this document and can be printed in the usual manner.

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2. BAV Dashboard Worksheet
The BAV Dashboard is a useful guide for new users of the BAV Model. As Exhibit 1 shows, the BAV
Dashboard is comprised of 8 ordered steps which, when followed in sequence, guide the user through the basic
steps of using the BAV model. To begin, select Step 1 by clicking on the first orb and you will be taken to the
Imported Income Statement worksheet where the process begins. After completing the required steps on the
imported financial statement worksheets (e.g., the Imported Income Statement, Imported Balance Sheet, and the
Imported Statement of Cash Flows), selecting the “Return to BAV Dashboard” hyperlink in the upper left
corner of any of the worksheets will take you back to the Dashboard, where you can proceed to the next step.
After selecting one of the eight Dashboard steps and visiting the associated model worksheet(s), upon returning
to the Dashboard, the step selected will automatically contain a check mark in the box at the bottom of each of
the orb, indicating that you have previously visited the related worksheet(s). These check marks help you to
keep track of the steps taken and those that remain. Please note that use of the BAV Dashboard is optional, and
as a basic guide, it does not represent the full functionality of the BAV Model. Once you are familiar with the
BAV Model worksheets, you may prefer to use the BAV-Navigator menu, which not only provides links to all
of the model worksheets, but also contains a host of additional features that are described below.

Exhibit 1. BAV Dashboard

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3. Worksheet “Overview and Instructions” Hyperlinks
Each worksheet that requires user input includes an ‘Overview and Instructions’ hyperlink in the upper left
corner that takes you to the specific portion of the instructions that pertain to that worksheet.

Exhibit 2. Worksheet Overview and Instruction Hyperlinks

4. Cell Comment Flags

Comment flags, denoted by a red triangle in the upper right-hand corner of a cell, provide further instruction, in
the form of either general guidance or definitions of specific cells. To view the contents of a comment box,
place the cursor over the red triangle and the comments will appear.

Exhibit 3. Cell Comment Flags

5. Color-coding
The BAV Model uses yellow shading to identify each cell requiring user input. Such “input cells” either
require you to enter text or a numeric value, or they contain a drop-down menu from which a selection is
required (see Exhibit 4).
Yellow-shaded input cells must not be left blank. * If the value for a yellow-shaded cell is zero, enter “0”
in that cell. *With the exception of select cells in the Accounting Adjustments worksheet -- Step 4 below -- all
yellow-shaded cells require user input. On the Key Assumptions worksheet, yellow-shaded input cells may be
located adjacent to gray-shaded cells. In contrast to yellow-shaded cells which require you to enter an input,
gray-shaded cells indicate that additional inputs are possible, but they are not required in all instances. Cells
without shading are output cells (containing either calculated or posted numbers) and are write-protected; any
attempt to overwrite these cells will prompt an error message.

Exhibit 4. BAV Model Cell-Shading (input cell and drop-down menu cell)

6. BAV Workbook Navigation Menu

The BAV Workbook Navigation Menu (hereafter, the “BAV-Navigator”) is located at the top of each
worksheet and contains a drop-down menu with selections that allow you to jump to any worksheet within the

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workbook (see Exhibit 5(a)). As shown in Exhibits 5(b), 5(c), 5(d), and 5(e), the BAV-Navigator menu also
includes a Custom Report Generator, which allows you to select desired worksheets for printing, a Clear
Selected Sheets menu, which provides options for clearing entire sections of the workbook, and Scenario
Management tools (described below).

Exhibit 5(a). BAV Workbook Navigation Menu - BAV-Navigator

Exhibit 5(b). BAV-Navigator - Printing using the Custom Report Generator

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Exhibit 5(c). BAV-Navigator - Clearing Selected Worksheets

A Note About Scenario Manager

Through the BAV-Navigator menu, you can access a scenario manager tool that allows you to name, save, and
review up to five different scenarios for the company being analyzed. In order to save your current work into a
scenario, first select the Save Scenario option from the BAV-Navigator menu (see Exhibit 5(a) above). As
shown in Exhibit 5(d), the Store Scenario window asks you to select a scenario from the drop-down menu
(scenario 1-5) and to provide a description for that scenario. After doing so and selecting OK, the named
scenario will be stored and can be retrieved at any time by selecting the Review Scenario option from the BAV-
Navigator menu (see Exhibit 5(a) above). As shown in Exhibit 5(e), the Review Scenario window identifies
the existing saved scenarios and allows you to revert to a previously saved scenario if desired. While scenario
manager treats the imported financial statements and their line item classifications as fixed, within each scenario
you can vary all of your Key Assumption inputs, including the forecast horizon, as well as all of the Accounting
Adjustments, allowing the user to perform a sensitivity analysis based on multiple inputs. Finally, if you save
multiple scenarios, Table 4 on the Valuation Summary worksheet displays the valuation results under each of
the named scenarios.

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Exhibit 5(d). Scenario Manager - Name and Save Scenarios 1-5

Exhibit 5(e). Scenario Manager - Review Scenarios 1-5

BAV Model - Worksheet Instructions:

Version 4.0 of the BAV Model has a new auto download feature that retrieves company financial statements
from the Compustat North American database for authorized Compustat WRDS users. To request a Compustat
WRDS account, see http://wrds.wharton.upenn.edu/. The instructions that follow are divided into sections that
pertain to Compustat WRDS users and those that pertain to non-Compustat WRDS users. Non-Compustat
WRDS users, please skip the following section and proceed to directly to “Step 1. Initial Setup”. WRDS users,
please review the following section “Step 1. Downloading Company Financial Statements from Compustat
WRDS”, then proceed directly to “Step 3. Output - Standardized Financial Statements”. WRDS users, please
note that in the event that a given company’s financial statements are not available in the Compustat WRDS
database, these financial statements will need to be manually imported from an alternative source. The

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instructions for manually importing financial statements are the same as those that pertain to non-Compustat
WRDS users and begin in the section titled “Step 1. Initial Setup”.

Click here to skip the WRDS instructions and go directly to “Step 1. Initial Setup”

Step 1. Downloading Company Financial Statements from Compustat WRDS

For authorized WRDS users, the first step in using the BAV Model is to download the desired company’s
financial statements from the Compustat WRDS database. To initiate a download request, navigate to the
Imported Income Statement worksheet, and select the “Download Company Financials from Compustat
WRDS” button located in the Initial Setup section at the top of the page.

Exhibit 6. Initiating a Download Request from Compustat WRDS

Selecting the “Download Company Financials from Compustat WRDS” button will prompt the “WRDS
Download Details” form. Where indicated, enter the company’s ticker symbol (e.g., AMZN for Amazon.com) ,
the starting and ending years corresponding to the financial statements you desire (e.g., 1997 and 1999,
respectively), and your WRDS username and password. Please note that if you initiate a subsequent download
request, your username will be retained, however, you will need to reenter your password for protection
purposes. Also note that if you are unsure of the company’s ticker symbol, you can select the “Ticker Look
Up” button, which will allow you to perform a search by company name or ticker symbol. Once you have
completed the download details form, select the “Download” button at the bottom of the form to initiate the
download request. Please note that the download process can take up to 30 seconds. For best results, do not
activate other programs during the download process.

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Exhibit 7. Completing the WRDS Download Details Form

As soon as the download process is finished, you will be notified that the process was completed successfully.
At this point, the yellow cells in Step 1 of the Initial Setup will have been automatically filled-in, and you will
be directed to proceed to Step 2: Select Valuation Type.

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Exhibit 8. WRDS Download Request Completed Successfully

After selecting either Equity or Asset Valuation from the Step 2 drop-down menu, proceed directly to the
Standardized Financial Statements worksheet to view the downloaded financial statements.

Exhibit 9. Select Valuation Type

At this stage, you are now able to verify whether the financial statements data that have been downloaded are
complete and are consistent with your understanding of the firm and its business. Often, the Compustat
database does not contain full details of the breakdown of net interest expense into the constituent interest

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income and expense items. If you have additional details available, you can type revised figures in the
appropriate cells in the imported financial statements worksheets. More generally, you can make changes, as
needed, to the imported financial statements by following the instructions below pertaining to non-Compustat
WRDS users, in the section titled “Step 1. Initial Setup”.

The WRDS auto download feature can be used repeatedly if desired. If you initiate a subsequent download
request, the newly downloaded data will overwrite the data initially retrieved. In the event that you manually
imported data for a company not contained in the WRDS database (instructions for doing so follow) and
subsequently decide to analyze a company that is contained in WRDS without saving the workbook and
opening a new model template, you will first need to clear the imported financial statements worksheets. To do
so, select the “Clear Selected Sheets” option from the BAV-Navigator drop-down menu located in the
workbook’s top menu bar and then select the clear “Imported Financials” option. In addition, if you identified
Key Assumptions and/or performed one or more Accounting Adjustments and want to clear these inputs as
well, you can do so by following the same steps (BAV-Navigator>Clear Selected Sheets>…) and select the
clear “Key Assumptions” and/or clear “All Accounting Adjustments” options.

Step 1. Initial Setup

The following instructions describe the process of manually importing company financial statements. These
instructions apply to both non-Compustat WRDS users and to WRDS users in instances when a company’s
financial statements are not available in the Compustat WRDS database.

Your first step in using the BAV Model is to complete the Initial Setup at the top of the Imported Income
Statement worksheet (see Exhibit 10). As detailed below, the Initial Setup consists of two basic steps: (1)
identifying the name of the firm being analyzed, the years for which its historical financial data is to be
inputted, as well as critical information for standardizing this data, and (2) selecting the type of valuation (firm
equity or assets).

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Please note that the BAV Model requires the Initial Setup to be completed before proceeding
to Step 2.
Exhibit 10. Initial Setup - (top portion of the Imported Income Statement worksheet)

Initial Setup - Specific Steps:

a) Navigate to the top of the Imported Income Statement worksheet.
b) Enter the company’s name in cell H4.
c) Select the ordering of years on the company’s imported financial statements (e.g., “Ascending” or
“Descending”) in cell H5.
d) Enter the date of the latest (most recent) imported income statement year in cell H6 (e.g., 2001).
e) Enter the earliest imported income statement year in cell H7 (e.g., 1997). {Note: the BAV Model can
accommodate between a minimum of two years and a maximum of ten years of historical financial
statement data.}
f) Select the fiscal year-end month and day in cells H8 and K8.
g) Select the units that the financial statements are expressed in (e.g., dollars -“$”, thousands - “000’s”, or
millions - “$MM”) in cell H9.
h) Select the valuation type (Equity or Asset Valuation) in cell H11, depending on whether you want to value
the equity or the assets (equity plus debt).

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Step 2.Importing Historical Financial Statement Data (including the income
statement, beginning balance sheet, and statement of cash flows) for the
company being analyzed

2.I. Imported Income Statement

a) Navigate to the Imported Income Statement worksheet (see Exhibit 11 below).
b) Import (copy>paste) the firm’s income statement labels (e.g., Sales, Cost of Sales) in column H, beginning
in cell H16.
c) Import the corresponding income statement data in column I, beginning in cell I16 (this step can be
combined with the previous step). At a minimum, you will need to import two years of data.
d) Confirm that the imported data is correctly aligned with the column year-headings (cells I15 - R15) which
are automatically generated.

Please note that the imported financial data cannot be separated by blank columns.
Exhibit 11. Importing Historical Financial Statements

2.2. Imported Beginning Balance Sheet

Both the Imported Income Statement and Imported Statement of Cash Flow worksheets call for importing the
firm’s historical year-end data as it is presented by the firm. In the Imported Balance Sheet, however, you are
asked to present the firm’s year-end account balances as the beginning account balances for the next year. The
reason for this shift is due to the underlying relationship between the balance sheet and the income statement.
Since businesses acquire assets (e.g., plants, raw materials, inventory, etc.) prior to generating revenues and
earnings, and since the revenue and earning capacity of a firm is determined by the availability of these assets, it
is useful to think of a firm’s performance in a given period in relation to its beginning balance sheet for that
period. To facilitate this comparison, you are asked to import the beginning balance sheet (the prior year-end

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balance sheet) for the years shown in the column headings (cells I5-R5). Also note that the range of historical
balance sheet years that the model can accommodate is bounded by the “earliest” and “latest” income statement
dates entered in the Initial Setup in the Imported Income Statement. The minimum number of historical
balance sheet years is defined as the two most recent years (e.g., the beginning balance sheet for the Latest
income statement year and the ending balance sheet for the Latest income statement, which is the beginning
balance sheet for the first forecast year). The maximum number of imported historical balance sheet years is
the same number of years of imported income statement data.

2.2. Imported Beginning Balance Sheet - Specific steps:

a) Navigate to the Imported Balance Sheet worksheet.
b) Import the firm’s balance sheet labels (e.g., Current Assets) in column H, beginning in cell H6.
c) Import the corresponding beginning balance sheet data in column I, beginning in cell I6. At a minimum,
you will need to import two years of data.
d) Confirm that the imported data matches the column year-headings (cells I5 - R5).

The imported financial data cannot be separated by blank columns.

2.3. Imported Statement of Cash Flows

a) Navigate to the Imported Statement of Cash Flows worksheet.
b) Import the firm’s Statement of Cash Flows labels (e.g., Cash Flow from Operating Activities) in column H,
beginning in cell H6.
c) Import the corresponding Statement of Cash Flows data in column I, beginning in cell I6. At a minimum,
you will need to import two years of data.
d) Confirm that the imported data matches the column year-headings (cells G5 - P5).

The imported financial data cannot be separated by blank columns.

Step 3. Classifying the Imported Income Statement, Balance Sheet, and

Statement of Cash Flow line-items
Firms use a variety of differing labels to refer to similar items in the financial statements. You therefore need to
standardize the imported financial statements into a format that will be used throughout the model. This
requires the following steps for each of the imported financial statements:
a) Navigate to the Imported Income Statement, Balance Sheet, or Statement of Cash Flows worksheet.
b) Column D in each of the imported worksheets consists of a series of yellow-shaded cells, each containing a
drop-down menu that is used to match the imported financial statement line-items to line-items using a
standardized financial statement taxonomy.

Click on a yellow-shaded classification cell, thereby activating the classification drop-down menu, and
select the menu label that corresponds to the firm’s imported label located in the adjacent cell in column H
(see Exhibit 12).

You must assign classification labels for each non-sub-total line-item. Drop-down menu labels also
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include select sub-total headings (e.g., Net Income, Total Assets, etc.) that also must be used.

If you have a question about the appropriate classification menu label to assign to a given line-item, select
the “Questions?” button next to the “Classifications” heading (see cell D15 in Exhibit 12 below). Doing so
will take you to the Classification Lookup worksheet in which you can select any of the classification
menu labels and view a sample of financial statement line-item labels classified under that menu heading.
The “Return to” buttons will take you back to the imported financial statement worksheet.

Because of the variability in reporting practices regarding the number of common shares outstanding (often
reported in the income statement, other times in the balance sheet or in the footnotes to the financial
statements), common shares outstanding can be classified in either the Imported Income Statement or in the
Imported Balance Sheet worksheets. In the event that shares outstanding are not reported in either the income
statement or the balance sheet, the number of shares outstanding must be manually entered in cell O54 of the
Key Assumptions worksheet. Also note that the number of shares outstanding must be expressed in the same
units that are used for the imported financial statements.

Exhibit 12. Classifying Imported Financial Statement Line-Items

Step 3. Contd. Reporting Variability and the Need for Changing Signs (+/-)
Though revenues are uniformly presented in the income statement as positive numbers, the reporting of both
expenses and other sources of income varies across firms. Some firms present expenses as positive numbers
(though they are treated as negative numbers in sub-total calculations), others present expenses as negative
numbers (e.g., -100 or (100)). Similarly, some firms report “other” sources of income as positive numbers,
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while others report them as negative numbers. Given this variability, the final step in the financial statement
line-item classification process is to tailor the BAV Model to conform to the firm’s reporting preferences by
indicating the need to change the sign (+ or -) of certain line-items.

Income Statement Sign Changes

Review the Imported Income Statement to determine whether the firm’s expenses (including operating
expenses, interest expense, and preferred dividends) are presented as negative numbers (e.g., -100 or (100)),
and/or whether the Interest Income and Other Income line items are presented as negative expenses. Where
either of these issues arise, use the ‘Change Sign?’ drop down menu in the adjacent cell in column F to identify
the affected line item with a negative sign. For example, as shown in Exhibit 13(a), Amazon.com reports the
Cost of Sales expense as a negative number (see Exhibit cell I17). Identifying this reporting configuration by
selecting the negative sign in cell F17 will ensure that the BAV Model treats this line item correctly.

Exhibit 13(a). Income Statement Sign Changes

Balance Sheet Sign Changes

Firms sometimes classify assets as negative liabilities, or liabilities as negative assets. To classify these as
positive assets or liabilities, you will need to use the ‘Change Sign?’ drop down menu in column F to identify
which balance sheet lines require changes in signs.

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Statement of Cash Flow Sign Changes
Firms’ reporting of cash flow information varies across both time and geography. All U.S. companies are
required to include a statement of cash flows in their financial statements under Statement of Financial
Accounts Standard No. 95 (SFAS 95). Most firms outside the U.S. (and U.S. firms prior to SFAS 95) report a
funds flow statement rather than a statement of cash flows. Funds flow statements show working capital flows,
rather than cash flows. Using the ‘Change Sign?’ drop-down menu in column F of the Imported Statement of
Cash Flows worksheet, you are able to convert a funds flow statement into a cash flow statement.

The standardized cash flow statement will only be correct if the firm reports cash inflows as positive
numbers, and cash outflows as negative numbers. As shown in Exhibit 13(b), if the firm you are analyzing
does not use this format (e.g., it shows both cash/fund inflows and cash/fund outflows as positive numbers) you
will need to use the ‘Change Sign?’ drop down menu in column F to identify which rows are cash outflows and
require changes in signs.

Exhibit 13b. Statement of Cash Flow Sign Changes

Step 3. Output - Standardized Financial Statements

Standardized Financial Statements serve as the foundation for subsequent accounting and financial statement
analysis and are automatically generated based on the imported financial statement line-item classification
process described above. As shown in Exhibit 14, using the “Expand/Collapse” buttons in the left margin, the
standardized balance sheet, income statement, and statement of cash flows can be viewed either separately or all
at once (for the latter, you will need to scroll down to view).

Looking left to right, the Standardized Financial Statements show the “As Reported” line-item values. As
described in the Accounting Adjustments section below, upon completion of an accounting adjustment, the
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Standardized Financials worksheet will also show both the net effect of all accounting adjustments, and the
“Adjusted Balance” (i.e., the “As Reported” values plus the net effect of all accounting adjustments) for each

Exhibit 14. Standardized Financial Statements

Step 4. Accounting Adjustments

Accounting analysis is a central component in the business valuation process. Financial statements prepared by
the firm and verified by independent auditors, in part, reflect management’s view about the firm’s expected
future performance. This view (or forecast) may not correspond with that of the analyst interested in valuing
the company. Where existing accounting practices are questioned, one or more accounting adjustments may be
needed to both supplant management’s view with the analyst’s view and to accurately portray the firm’s
financial statements.

As shown in the top portion of Exhibit 15, instructions for completing accounting adjustments are shown at the
top of the Accounting Adjustments worksheet. To make one or more accounting adjustments, first navigate to
the Accounting Adjustments worksheet using either the “Adjust?” buttons located in column A of the
Standardized Financial Statements worksheet, the BAV-Navigator, or simply select the Accounting
Adjustments worksheet tab at the bottom of the screen.

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Begin by entering the company’s marginal tax rate in cell D4. Next, with the desired adjustment in mind,
review the accounting adjustment category headings in the Menu of Financial Statement Adjustments to
identify the appropriate adjustment category. Using the “Expand/Collapse” buttons in the left margin, select the
desired adjustment category. Once the accounting adjustment category is selected, a sub-menu of specific
accounting adjustments will appear. Select specific adjustments by placing a check-mark (left-click) in the
corresponding box(es). As each box is checked, a template for the selected adjustment will appear below the
adjustments menu (you will need to scroll down the worksheet or click the ‘Go to Entry Form’ link to view).
Specific instructions for each adjustment template are revealed (or hidden) by selecting the “Show
Instructions/Hide Instructions” button at the top of each template.

Exhibit 15. Selecting Accounting Adjustments

Accounting Adjustment Note 1:

As is the case throughout the BAV Model, input cells are shaded yellow and output cells
are shaded white. However, unlike other areas within the workbook, not all yellow-shaded cells require
inputs (that is, you may be presented with a choice of several financial statement accounts to adjust, and need
only select one).

Accounting Adjustment Note 2:

If you are unable to locate the desired accounting adjustment template in the menu of adjustments presented,
accounting adjustment V.3, “Other Adjustments - Other” shown above in Exhibit 15, can be used to modify the
firm’s balance sheet and income statement to reflect the desired adjustment. Also note that “Other” adjustments

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contain a reconciliation check to make sure that the adjustment inputs reconcile. If a reconciliation error exists,
the amount of the imbalance will appear in bold red font at the bottom of the adjustment template.

Step 5. Identifying Key Assumptions

Prospective analysis includes two tasks - forecasting and valuation. Forecasting is a way of summarizing what
has been learned through business strategy analysis, accounting analysis, and financial analysis. Accordingly, a
forecast can be no better than the business strategy analysis, accounting analysis, and financial analysis
underlying it. In identifying key assumptions, you are defining your expectation for the firm’s performance
throughout the forecast horizon.

Though a wide range of factors are considered in determining forecast assumptions, the Key Assumptions
worksheet only requires input for a select group of ratios. The components that comprise the Key Assumption
ratios are defined on the BAV Identities worksheet (see Exhibit 16). These identities, in turn, collectively
form the firm’s condensed income statement and balance sheet shown in the Condensed Financial Statements
worksheet (see Exhibit 17).

Exhibit 16. BAV Identities worksheet

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Exhibit 17. Condensed Financial Statements worksheet

Assessing the Plausibility of Forecast Assumptions

As you decide upon the key assumptions that will determine the future performance of the firm, it is often
useful to consider how these projections compare to both the firm’s historic performance and to the historic
performance of comparable firms. Together, the Ratio Analysis and Performance Charts worksheets can
assist you in making such comparisons.

Ratio Analysis worksheet

The Ratio Analysis worksheet is divided into four sections containing ratios for evaluating profitability and
operating, investment, and financial management (see Exhibit 18). Sections may be viewed separately or all at
once by toggling the ‘Expand/Collapse’ buttons in column A. Using the drop-down menu in Exhibit cell D6,
you can select balance sheet ratio calculations based on beginning, ending, or average balance sheet values.

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Exhibit 18. Ratio Analysis worksheet

Performance Charts worksheet

The Performance Charts worksheet can be accessed through either the BAV-Navigator Menu or by using the
“View Charts” button located at the top of the Key Assumptions worksheet (see cell L2 in Exhibit 21 below).
The Performance Charts worksheet shows the firm’s historic and pro forma sales growth, net operating profit
after tax (NOPAT) margin, net asset turnover, operating return-on-assets (ROA), and return-on-equity (ROE).
As shown in Exhibits 19(a) and 19(b), each firm-specific chart is paired with a related chart showing the
performance for comparable U.S. firms in the period 1984-2001. The drop-down menu located above each firm
chart can be used to adjust the scale of the y-axis to match that of either the related U.S. Historic Comparables
chart (the default setting) or to the firm’s historical performance.

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Exhibit 19(a). Performance Charts worksheet - scaled to U.S. Comparables

Exhibit 19(b). Performance Charts worksheet - scaled to the firm’s historical performance

The forecasting process should be embedded in an understanding of how various financial statistics behave on
average. Absent detailed information to the contrary, one would expect sales and earnings numbers to persist at
their current levels, adjusted for overall trends of recent years. However, rates of return on investment (ROA
and ROE) tend, over several years, to revert close to the Weighted Average Cost of Capital and to the Cost of
Equity Capital, respectively. Profit margins also tend to revert to a normal level that varies widely across firms
and industries, depending on levels of asset turnover and leverage. Some firms are capable of creating barriers
to entry that enable them to fight these tendencies toward normal returns, even for many years, but
such firms are the unusual cases.

Step 5. Contd. - Inputting Key Assumptions

The following steps are required to input your assumptions:

a) Navigate to the Key Assumptions worksheet.

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b) In the Forecast Horizon text box (shown below), enter the number of years for the firm’s forecast horizon.
The forecast horizon can be thought of as the number of years that you expect it will take for the firm to
reach a steady-state operating performance level. The minimum forecast horizon is two years and the
maximum is 15 years.

Exhibit 20. Key Assumptions - Forecast Horizon

c) Enter growth rate, profit margin, and productivity-related assumptions for the desired number of forecast
years in rows 12-15 (see Exhibit 21).

For firms with four to ten years of imported historical financial data, the “Show Early Years” button in Exhibit
cell D2 can be used to view the trend line performance of the firm along these dimensions throughout the

d) Enter assumptions for the same line-items for the terminal forecast period in cells O19-O22. The terminal
period begins in the year following the selected forecast horizon.

Exhibit 21. Identifying Key Assumptions (steps c and d)

Step 5. Identifying Key Assumptions (Cont.)

e) Enter Market Value Leverage and Cost of Capital parameters for the first forecast year in cells O33-O34
and O40-O48, respectively (see Exhibit 22). Market leverage ratio entry raises a tricky issue. If we are
trying to value the firm, how do we know the market leverage? To avoid circularity, you can use the market
leverage ratio for other firms in the same industry. Alternatively, you can enter a “starting” estimate; then

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when you have valued the firm you can re-estimate its market leverage and enter revised ratios. After doing
this several times, the forecasted market leverage ratios should be consistent with your valuation.

f) Confirm that the number of common shares outstanding is reported in cell O54. If not, enter the number of
shares outstanding, using the same units used for the financial statements.

Exhibit 22. Identifying Key Assumptions (steps e and f)

Step 5. Contd. - Identifying Key Assumptions

Capital Structure Assumptions: Book and Market Leverage, and the Cost of Capital
The beginning book value leverage for the first forecast year is already determined based on the firm’s last
reported balance sheet. However, you can modify the firm’s capital structure in forecast year 2 by changing
(gray-shaded) book value leverage cells P26 and P27 (see Exhibit 22 above). You may make further
adjustments to book leverage in years 3 and on by continuing to enter values in the adjacent cells in rows 26 and
27. Once you reach the point that book leverage is stable in future years, you can stop entering new leverage
forecasts. The model will then repeat the last entered forecasts throughout the remaining forecast horizon.

Note that if in a given year you change the firm’s book leverage (or carry forward the prior year’s values in
anticipation of making changes in future periods), you must also change (or carry forward) the firm’s market
leverage and cost of capital parameters in that year. Based on these estimates, the model shows imputed betas
for debt, preferred stock, and common equity, assuming that the firm’s asset beta remains fixed. Adjustments to
the firm’s asset beta are permitted in forecast year 2 and beyond. Note that the asset beta will change only if the
firm’s business changes.

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Valuation Worksheets:
Pro Formas & Valuation worksheet
The Condensed Financial Statements and your Key Assumption inputs collectively determine the firm’s pro
forma financial performance during the forecast horizon. The Pro Formas & Valuation worksheet consists of
four panels showing the Pro Forma Financial Statements (shown in Exhibit 23 below), followed by valuations
under the Discounted Cash Flow, Abnormal Earnings, and Abnormal Returns valuation methods, respectively.
To aid in navigating the Pro Formas & Valuation worksheet, a “Display Control” box (shown in Exhibit 23)
provides several display options. As the names imply, “Pro Forma Only” shows just the Pro Forma, while
“Show All” shows the Pro Forma and all three valuation panels. You can also choose to look at the pro forma
along with any of the three valuation panels.

Exhibit 23. Pro Forma Financial Statements

That while reviewing the Pro Formas and Valuation worksheet, the Auditing Toolbar shown in Exhibit 24 (go
to Tools | Auditing | Show Auditing Toolbar) can be used to show the relations between various cells in the

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Exhibit 24. Pro Forma Financial Statements and the Auditing Toolbar

Valuation Summary worksheet

The Valuation Summary is the final output worksheet and consists of four tables. The first table reports the
valuation estimates for the firm’s assets or common equity (based on your Initial Setup selection) under each of
the three valuation methods. The second table provides the name of each of the selected accounting
adjustments (if any) and a summary of the net effect of these adjustments on net income to common, beginning
book value of common shareholders’ equity, and return-on-equity in the latest statement year. The third table
shows the key assumptions underlying the valuation estimates. Pro forma return-on-assets and return-on-equity
are also shown for comparison to the firm’s weighted-average cost of capital (WACC) and to the cost of
common equity. If multiple scenarios are saved during the analysis process, the valuation estimates for the
firm’s assets or equity (based on your Initial Setup selection) under each of the five possible saved scenarios are
reported in the fourth table. In addition to the tables mentioned above, if any errors occur in the initial financial
statement line-item classification process, a message will appear indicating whether the classification error(s)
relate to the balance sheet or to the income statement classifications.

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