COMPREHENSIVE Excel Tutorial Developing a Financial Analysis

COMPREHENSIVE

Excel Tutorial

Developing a Financial Analysis

XPXPObjectives• Work with financial functions to analyze loans

and investments• Create an amortization schedule• Calculate a conditional sum• Interpolate and extrapolate a series of values• Calculate a depreciation schedule

New Perspectives on Microsoft Office Excel 2007 2

XPXPObjectives• Determine a payback period• Calculate a net present value• Calculate an internal rate of return• Trace a formula error to its source


XPXPWorking with Loans and Investments• To calculate the present value of a loan or investment, use the PV

function• To calculate the future value of a loan or an investment, use the

FV function• To calculate the size of the monthly or quarterly payments

required to pay off a loan or meet an investment goal, use the PMT function

• To calculate the number of monthly or quarterly payments required to pay off a loan or meet an investment goal, use the NPER function

• To calculate the interest of a loan or investment, use the RATE function


XPXPWorking with Loans and Investments• =PMT(rate, nper, pv, [fv=0] [type=0])• =FV(rate, nper, pmt, [pv=0] [type=0])• =NPER(rate, pmt, pv, [fv=0] [type=0])• =PV(rate, nper, pmt, [fv=0] [type=0])• =RATE(nper, pmt, pv, [fv=0] [type=0])


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XPXPCalculating a Loan Payment• The functions to work with loans are the same

ones you used to work with investments


XPXPCreating an Amortization Schedule• To calculate the amount of interest due in a

specified payment period from a loan, use the IPMT function

• To calculate the amount of a loan payment used to pay off the principal of the loan, use the PPMT function

• =IPMT(rate, per, nper, pv, [fv=0] [,type=0])• =PPMT(rate, per, nper, pv, [fv=0] [,type=0])


XPXPCreating an Amortization Schedule


XPXPCalculating Yearly Interest and Principal Payments• One way of calculating totals from several

payment periods is to use the Analysis Tool-Pak add-in

• =CUMIPMT(rate, nper, pv, start, end, type)• =CUMPRINC(rate, nper, pv, start, end, type)


XPXPCalculating Yearly Interest and Principal Payments


XPXPProjecting Future Income and Expenses• An income statement, also known as a profit

and loss statement, shows how much money a business makes or loses over a specified period of time


XPXPInterpolating a Series of Values• Select the range with the first cell containing the

starting value, blank cells for middle values, and the last cell containing the ending value

• In the Editing group on the Home tab, click the Fill button, and then click Series

• Specify whether the series is organized in rows or columns and the type of series to interpolate. Check the Trend check box

• Click the OK button to insert the interpolated series into the middle cells


XPXPExtrapolating a Series of Values• Select a range with the first cell containing the starting

value followed by blank cells to store the extrapolated values

• In the Editing group on the Home tab, click the Fill button, and then click Series

• Select whether the series is organized in rows or columns. Select the type of series to extrapolate into the blank cells. Enter the step value in the Step value box

• Click the OK button to insert the extrapolated series into the blank cells


XPXPExtrapolating a Series of Values


XPXPCalculating Depreciation• To calculate a straight-line depreciation, use the SLN

function• To calculate a declining balance depreciation, use the

DB function• To calculate a sum-of-years’ digit depreciation, use the

SYD function• To calculate a double-declining balance depreciation,

use the DDB function• To calculate a variable depreciation, use the VBD

function


XPXPCalculating Depreciation


XPXPWorking with Payback Period• One simple measure of the return from an

investment is the payback period, which is the length of time required for an investment to recover its initial cost


XPXPCalculating Net Present Value• The time value of money is based on the

assumption that money received today is worth more than the same amount received later


XPXPDetermining the Return from an Investment• To calculate the net present value when the initial investment is made

immediately, use the NPV function with the discount rate and the series of cash returns from the investment. Subtract the cost of the initial investment from the value returned by the NPV function

• To calculate the net present value when the initial investment is made at the end of the first payment period, use the NPV function with the discount rate and the series of cash returns from the investment. Include the initial cost of the investment as the first value in the series

• To calculate the internal rate of return, use the IRR function with the cost of the initial investment as the first cash flow value in the series. For investments in which there are several positive and negative cash flow values, include a guess to aid Excel in arriving at a reasonable internal rate of return value


XPXPUsing the NPV Function• =NPV(rate, value1 [value2, value3, ...])


XPXPUsing the NPV Function


XPXPCalculating the Internal Rate of Return• The point at which the net present value of an

investment equals 0 is the internal rate of return (IRR)

• =IRR(values, [guess=0.1])


XPXPCalculating the Internal Rate of Return


XPXPExploring other Financial Functions• For cash flows that appear at unevenly spaced

intervals, you use the XNPV and XIRR functions– =XNPV(rate, values, dates)– =XIRR(values, dates, [guess = 0.1])


XPXPTracing Error Values• Select the cell containing an error value• In the Formula Auditing group on the Formulas tab, click the Error

Checking button arrow and then click Trace Error• Follow the tracer arrows to a precedent cell containing an error

value• If the tracer arrow is connected to a worksheet icon, double-click

the tracer arrow and open the cell references in the worksheet• Continue to trace the error value to succeeding precedent cells.

When you locate a cell containing an error value that has no precedent cells with errors, you have located the source of the error


XPXPTracing Error Values


XPXP

Chapter 6 –Chapter 6 –SupportSupport

Financial Statement Financial Statement AnalysisAnalysis

Financial Statement Financial Statement AnalysisAnalysis

XPXPRemember?Common-size AnalysisRemember?Common-size Analysis

An analysis of percentage financial statements where all balance sheet items are divided by total assets and all income

statement items are divided by net sales or revenues.

An analysis of percentage financial statements where all balance sheet items are divided by total assets and all income

statement items are divided by net sales or revenues.

XPXPand Remember? Index Analysesand Remember? Index Analyses

An analysis of percentage financial statements where all balance sheet or income statement figures for a base year equal 100.0 (percent)

and subsequent financial statement items are expressed as percentages of their values in the

base year.

An analysis of percentage financial statements where all balance sheet or income statement figures for a base year equal 100.0 (percent)

and subsequent financial statement items are expressed as percentages of their values in the

base year.

XPXPUse Excel to Conduct a Common-Size Analysis

First, go to http://finance.yahoo.com and type in ‘GOOG’ in the ‘Get Quotes’ box to find a company like Google.

Source: Reproduced with permission of Yahoo! Inc. ® 2008 by Yahoo! Inc. YAHOO! and YAHOO! logo are trademarks of Yahoo! Inc.


Next, click the ‘Get Quotes’ box to access the Google data.

Notice on the left side all of the data that Yahoo! Provides for users.



Notice the important financial data?

We will click on the ‘Income Statement’ and then the ‘Balance Sheet’ links to copy and paste the data into Excel.


XPXPSnapshot of Google Balance Sheet from Yahoo! Finance

Here is the balance sheet data.

Highlight and copy into an open worksheet in Excel


XPXPSnapshot of Google Income Statement from Yahoo! Finance

Here is the income statement data.

Highlight and copy into an open worksheet in Excel


XPXPNow create the Common-size analysis

We have tweaked some of the data cells pasted as they are not copied as ‘numbers’, but ‘text’ formatting. The result is the ability to analyze quickly and easily.

XPXPNow create the Common-size analysis

Notice we see R&D and SGA increasing faster than revenue, but it has been offset by lower cost of revenue and taxes.

XPXPNow create the Index analysis

Again, we can see that R&D and SGA are rising faster than revenue, but we also see that other income is growing fast resulting in net income available to common shareholders growing slightly faster than revenue.

XPXPWe can do the same on the Balance Sheet!

Again, we analyze similarly and can see that some longer-lived assets are seeing huge increases (goodwill and PP&E) which is being financed by internally generated funds shown via RE.

XPXP

Ratio AnalysisRatio Analysis• We can, of course, now utilize the data you

have in Excel to conduct ratio analysis. • You would likely want to also collect

industry relevant data.• The result would allow you to do the type of

analysis discussed in the text.

• We can, of course, now utilize the data you have in Excel to conduct ratio analysis.

• You would likely want to also collect industry relevant data.

• The result would allow you to do the type of analysis discussed in the text.

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Financial Forecasting

FIL 341Prepared by Keldon Bauer

XPXPDefinitions

• Financial Planning (Financial Statement Forecasting):– Using the understanding of the financial system to

project sales, income and assets needed based on production and marketing strategies.

– Assessing operating cash flows to determine financial resources needed.

– Planning sources of any additional funds.– Managing cash to repay investors.

XPXPPlanning - Step 1: Sales Forecast• All profit and resource (balance sheet) forecasts

are based on the sales forecast.• This is probably the most difficult step.• Should be based on marketing strategy,

estimates of market share, economic forecasts, etc.

XPXPPlanning - Step 1: Sales Forecast• One major reason for forecasting financial

statements is to plan for cash needs. Therefore it is absolutely critical that seasonal factors are taken into consideration.

• Regression can be used to estimate future sales.– There are better methods available, but this is the

only one with which you are likely to be familiar.

XPXPPlanning - Step 1: Sales Forecast

• The first step in running a time-series regression is collecting the quarterly sales.

• There are two sources for quarterly sales data:– The 10-k usually contains quarterly operating

information for the last two years.– If that doesn’t work, you can get the sales off the

10-Q reports (quarterly financial statements).• There is no 4th quarter 10-Q, back out fourth quarter

using the annual data in the 10-k


• Collect five years of quarterly sales data, and order them from oldest to most current.

• Because sales are what we want to predict, we will use them as our dependent (response) variable.

• The only independent (predictor) variables we will use are time and season.– Time will indicate how many quarters have lapsed.– Season is a set of indicator (dummy) variables.


Quarter Sales Time 1st Qtr 2nd Qtr 3rd Qtr1999 1st Qtr 13,622,730 1 1 0 0

2nd Qtr 23,200,428 2 0 1 03rd Qtr 34,458,907 3 0 0 14th Qtr 26,817,119 4 0 0 0

2000 1st Qtr 15,131,033 5 1 0 02nd Qtr 23,114,100 6 0 1 03rd Qtr 37,230,069 7 0 0 14th Qtr 27,753,785 8 0 0 0




• For Rocky Shoe & Boot Company the data look like this:

XPXP

Planning - Step 1: Sales Forecast

• We will be using Excel’s regression function.• Make sure your copy of Excel has the Analysis Toolpak

added-in.• To check, click on the Tools menu.

– One option on that menu should be Data Analysis.• If that option is there then you are good to go.• If not you will have to add it in.

XPXPPlanning - Step 1: Sales Forecast• If Data Analysis is not under the Tools menu,

then choose Add-Ins from the Tools menu.– Then click on both Analysis Tool-Paks.– Then click OK

• Now we should be ready to conduct a regression analysis.

XPXPPlanning - Step 1: Sales Forecast• Under the Tools menu, choose Data Analysis.

– From the dialog box, choose regression.– This will bring up another dialog box.

• Using the box next to the Y-Range, highlight the Sales data you collected.

• Using the box next to the X-Range, highlight the time, and seasonal variables you created.

– Both of these ranges should cover just as many rows!!

• Tell Excel where to put the output and click OK.

XPXPPlanning - Step 1: Sales Forecast• Our model in our example has been set up to

forecast sales as a function of time, and season:– Sales = constant + slope1*time + slope2*Qtr1 +

slope3*Qtr2 + slope4*Qtr3

• For any quarter in the future, we will only need to forecast the time variable and the set of indicator variables to get a sales forecast.

XPXPPlanning - Step 1: Sales Forecast• The forecasts based on this model can be found

in this spreadsheet.• Based on the regression output, the seasons are

statistically significant, but time is not.– Meaning, there is a seasonal component to their

sales.– However, sales do not appear to grow over time.

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Planning - Step 1: Sales Forecast

$0

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

$30,000,000

$35,000,000

$40,000,000

$45,000,000

1999 2000 2001 2002 2003 2004 2005 2006

AcutalEstimated

XPXPPlanning - Step 2: Project Income• Start from the sales forecasts• Identify those lines of the income statement that

depend on sales (are variable) and those that don’t (are fixed).

• Project all lines based on estimates of sales.– Using the 10-Q, regression can be used to estimate

the variable/fixed components of costs as a function of sales.

XPXPPlanning - Step 2: Project Income• To empirically model fixed versus variable costs,

use the following regression equation:– y = fixed portion + variable portion (sales)– To estimate the fixed and variable portions, use the

regression modeling functions as described earlier.• The y variable is the subject cost.• The x variable is the sales.• Excel will estimate the fixed/variable coefficients.

XPXPPlanning - Step 2: Project Income• In each case, use the statistical tests to assess

whether a relationship exists between the cost and sales.– If there isn’t a relationship, assume it to be a

relatively fixed cost.

• After using regression, use your head to come up with the final estimates, which can be vastly different from the regression estimates.

XPXPPlanning - Step 2: Project Income• After you have projected all lines of the income

statement, assess the dividend policy of the company.– Do they declare a fixed amount as dividends?– Do they declare a proportion of earnings as

dividends?

• Then project the dividends declared based on their past behavior.

Documents

COMPREHENSIVE Excel Tutorial Developing a Financial Analysis