Hey everyone! This week we're going to examine some important models in the world of finance. Financial models are used for making decisions and performing an analysis of what might happen in the future. Executives can use financial models to make decisions about raising capital, mergers,and acquisitions, growing a business, valuing a business, etc. There are various types of models, ranging in use from investment banking to stock analysis. This week, our articles will cover the three statement model, discounted cash flow model, and comparable company analysis.
This model links the three statements (income, balance sheet, cash flow) into one dynamic model. This model is the foundation for more advanced models, and thus knowing it is vital to your success in the financial industry. You can download a free 3 statement financial model from Corporate Finance Institute Marketplace.
The discounted cash flow model is relatively easy to understand. A DCF model is simply a forecast of a company's future unlevered free cash flows discounted by the weighted average cost of capital to the present day. You will likely encounter this kind of model within your courses at JSOM, so brushing up on it isn't gonna hurt!
This model is a valuation methodology that looks at similar ratios across different companies. Once these similar ratios are established, it's used to derive the value of another business. Comps are about as mechanical as a DCF model, however it's important to note that this form of analysis must be done right in order to be informational. Comparing companies that operate in different industries will produce poor results, so make sure you're comparing apples to apples!