1. COMPREHENSIVE Excel Tutorial Developing a Financial Analysis

2. XP Objectives 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 20072

3. XP Objectives Determine a payback period Calculate a net present value Calculate an internal rate of return Trace a formula error to its source New Perspectives on Microsoft Office Excel 20073

4. XP Working 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 New Perspectives on Microsoft Office Excel 20074

5. XP Working 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]) New Perspectives on Microsoft Office Excel 20075

6. XP

8. Calculating a Loan Payment The functions to work with loans are the same ones you used to work with investments New Perspectives on Microsoft Office Excel 20078

9. XP Creating 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]) New Perspectives on Microsoft Office Excel 20079

10. XP Creating an Amortization Schedule New Perspectives on Microsoft Office Excel 200710

11. XP Calculating 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) New Perspectives on Microsoft Office Excel 200711

12. XP Calculating Yearly Interest and Principal Payments New Perspectives on Microsoft Office Excel 200712

13. XP Projecting 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 New Perspectives on Microsoft Office Excel 200713

14. XP Interpolating 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 New Perspectives on Microsoft Office Excel 200714

15. XP Extrapolating 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 New Perspectives on Microsoft Office Excel 200715

16. XP Extrapolating a Series of Values New Perspectives on Microsoft Office Excel 200716

17. XP Calculating 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 New Perspectives on Microsoft Office Excel 200717

18. XP Calculating Depreciation New Perspectives on Microsoft Office Excel 200718

19. XP Working 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 New Perspectives on Microsoft Office Excel 200719

20. XP Calculating 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 New Perspectives on Microsoft Office Excel 200720

21. XP Determining 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 New Perspectives on Microsoft Office Excel 200721

22. XP Using the NPV Function =NPV(rate, value1 [value2, value3,...]) New Perspectives on Microsoft Office Excel 200722

23. XP Using the NPV Function New Perspectives on Microsoft Office Excel 200723

24. XP Calculating 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]) New Perspectives on Microsoft Office Excel 200724

25. XP Calculating the Internal Rate of Return New Perspectives on Microsoft Office Excel 200725

26. XP Exploring 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]) New Perspectives on Microsoft Office Excel 200726

27. XP Tracing 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 New Perspectives on Microsoft Office Excel 200727

28. XP Tracing Error Values New Perspectives on Microsoft Office Excel 200728

29. XP Chapter 6 – Support Financial Statement Analysis

30. XP Remember? 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.

31. XP and 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.

32. XP Use 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.

33. XP Use Excel to Conduct a Common-Size Analysis 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. Source: Reproduced with permission of Yahoo! Inc. ® 2008 by Yahoo! Inc. YAHOO! and YAHOO! logo are trademarks of Yahoo! Inc.

34. XP Use Excel to Conduct a Common-Size Analysis 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. Source: Reproduced with permission of Yahoo! Inc. ® 2008 by Yahoo! Inc. YAHOO! and YAHOO! logo are trademarks of Yahoo! Inc.

35. XP Snapshot of Google Balance Sheet from Yahoo! Finance Here is the balance sheet data. Highlight and copy into an open worksheet in Excel Source: Reproduced with permission of Yahoo! Inc. ® 2008 by Yahoo! Inc. YAHOO! and YAHOO! logo are trademarks of Yahoo! Inc.

36. XP Snapshot of Google Income Statement from Yahoo! Finance Here is the income statement data. Highlight and copy into an open worksheet in Excel Source: Reproduced with permission of Yahoo! Inc. ® 2008 by Yahoo! Inc. YAHOO! and YAHOO! logo are trademarks of Yahoo! Inc.

37. XP Now 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.

38. XP Now 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.

39. XP Now 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.

40. XP We 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.

41. XP Ratio 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.

42. XP Financial Forecasting FIL 341 Prepared by Keldon Bauer

43. XP Definitions 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.

44. XP Planning - 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.

45. XP Planning - 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.

46. XP Planning - 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 4 th quarter 10-Q, back out fourth quarter using the annual data in the 10-k

47. XP Planning - Step 1: Sales Forecast 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.

48. XP Planning - Step 1: Sales Forecast For Rocky Shoe & Boot Company the data look like this:

49. XP 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.

50. XP Planning - 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.

51. XP Planning - 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.

52. XP Planning - 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 + slope 1 *time + slope 2 *Qtr1 + slope 3 *Qtr2 + slope 4 *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.

53. XP Planning - Step 1: Sales Forecast The forecasts based on this model can be found in this spreadsheet.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.

54. XP Planning - Step 1: Sales Forecast

55. XP Planning - 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.

56. XP Planning - 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.

57. XP Planning - 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.

58. XP Planning - 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.