Top 9 Examples of Financial Modeling
Financial modeling is used by the financial analysts for several purposes like cost and benefit analysis of a new proposed project or analyzing the impact of change in economic policy on stock’s performance or for the valuation of the business and its comparison with competitors in the market. Some of the examples of financial modeling include three statement modeling, DCF Modeling, Merger Modeling, IPO Modeling, LBO Modeling, Option Pricing Model etc.
Table of contents
- Top 9 Examples of Financial Modeling
- #1 – Three Statement Modeling
- #2 – Discounted Cash Flow (DCF) Modeling
- #3 – Merger Finance Modeling
- #4 – Initial Public Offering (IPO) Model
- #5 – Leveraged Buyout (LBO) Modeling
- #6 – Sum-of-the Parts Modeling
- #7 – Consolidation Modeling
- #8 – Budgeting and Forecasting Modeling
- #9 – Option Pricing Model
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In this article, we discuss the top 9 financial modeling examples –
#1 – Three Statement Modeling
In the 3 statements model3 Statements ModelA 3 statement model is a type of financial modeling that connects three key financial statements: income statements, balance sheets, and cash flow statements. It prepares a dynamically linked single economic model used as the base of complex financial models like leverage buyout, discounted cash flow, merger models, and other financial models., the income statement, balance sheet, and cash flow statement all are linked together with the excel formulae, and this helps in the analysis of historical financial statements and forecasting future statements. Forecasting of financial statements will help financial analysts to understand how the company will perform after taking into consideration a variety of assumptions.
#2 – Discounted Cash Flow (DCF) Modeling
The DCF ValuationDCF ValuationDiscounted cash flow analysis is a method of analyzing the present value of a company, investment, or cash flow by adjusting future cash flows to the time value of money. This analysis assesses the present fair value of assets, projects, or companies by taking into account many factors such as inflation, risk, and cost of capital, as well as analyzing the company's future performance. modeling is done taking three statement model as a base and is used to calculate the value of the business or the company’s net present value (NPV) of the future cash flow. The DCF modeling takes the projected cash flow from 3 statement model and discounts them to their present value after making necessary adjustments.
#3 – Merger Finance Modeling
This type of modeling is used to analyze the merger and acquisitionMerger And AcquisitionMergers and acquisitions (M&A) are collaborations between two or more firms. In a merger, two or more companies functioning at the same level combine to create a new business entity. In an acquisition, a larger organization buys a smaller business entity for expansion. decision of two companies. A merger happens when two companies come together under mutual agreement, whereas an acquisition happens when one company overtakes others in return for some cash price.
#4 – Initial Public Offering (IPO) Model
This model looks into the market with the help of a comparable company’s analysis to understand how much the investors will be ready to pay for the company’s stock in an IPO.
#5 – Leveraged Buyout (LBO) Modeling
A leveraged buyoutLeveraged BuyoutLBO (Leveraged Buyout) analysis helps in determining the maximum value that a financial buyer could pay for the target company and the amount of debt that needs to be raised along with financial considerations like the present and future free cash flows of the target company, equity investors required hurdle rates and interest rates, financing structure and banking agreements that lenders require. is the acquisition of one company by another company with the help of borrowed funds. Leveraged buyout modeling helps in the determination of the value that the buyer would be ready to pay and the level of debt that would be needed to be raised. It also calculates the present and future cash flow of the company to be purchased.
#6 – Sum-of-the Parts Modeling
This financial model is used to calculate the value of each division in the organization separately to determine its worth if any other company acquires it. The sum of the parts methodSum Of The Parts MethodSum of the Parts Valuation is a valuation method wherein each of the subsidiary or segment of a Company is separately valued & then all of them are added together to estimate the business’s total value. is calculated through different types of analysis methods like discounted cash flow (DCF) model, asset-based valuationAsset-based ValuationAsset-based valuation refers to one of the approaches used to calculate the value of a business. It values a business based on the assets it possesses., market value, etc. Each part is then added together to derive the value of the sum of the part (SOTP).
#7 – Consolidation Modeling
Consolidated modeling is prepared by consolidating all 3 financial statements, i.e. income statement, balance sheet, and cash flow statement of different business units into one.
#8 – Budgeting and Forecasting Modeling
The financial analysts perform the budget modeling to determine the budget for the cost and income of the company for the upcoming time. Budgets are generally prepared on a monthly or quarterly basis. They depend upon historical income statement for input purposes. Whereas, the financial analyst does forecast modeling to prepare a forecast against the budget. Many times budget and forecasting modeling is done on the single tab together, and other times they are done separately.
#9 – Option Pricing Model
The financial analysts use the option pricing model to determine the theoretical value of an option, i.e. the value of an option after taking all the known input under consideration. It helps financial analysts in deciding the fair value of an option. It is a mathematical model prepared based on mathematical formulas.
This has been a guide to top 9 examples of financial modeling including three statement modeling, DCF Modeling, Merger Modeling, LBO Modeling, IPO Modeling, Options Pricing Model etc. You can learn more about finance from the following articles –