- Understand the main approaches and key concepts involved in the classical financial applications of: valuation, cost-of-capital calculations, financial statement modelling and portfolio analysis.
- Create an understanding of the modelling issues faced in each main application area.
- Highlight and develop the skills and structures necessary to conduct analysis and create models in these areas.
- Overview. This course covers core aspects of corporate finance analysis and modelling. It starts with a coverage of ratio analysis and related topics such as Dupont- and portfolio- analysis for analysing individual companies as well as industries and portfolios of investments. It then discussed financial statements, including the meaning of financial statements and examples of how these are affected by transactions in business operations. It the modelling (forecasting) of financial statements using a step-by-step methodology. It discusses how more detail and sophistication can be added to each step, as necessary in specific contexts. In the valuation section, it covers the principles of valuation, especially cash flow methods. It covers the time value of money and the effect of leverage on this. Toward the end of the course, we cover some alternative approaches to accounting for leverage in valuation, as well as some related areas, including merger modelling and project finance models. The final part covers the classical Markowitz model for portfolio optimisation. The course also covers the core principles and methods in quantitative finance. It begins with topics related to optimisation, and then discusses real-options, options and derivates, as well as credit modelling.
- Practical Work and Exercises. Readers are expected to build simple examples for themselves as they follow the text. The course also contains downloadable data sets or simple models that allow a reader to do this practical work without having to enter large sets of data or repeat previous steps.
- Introduction to financial statements. Meaning and interpretation. Core transactions and their effects on each statement.
- The modelling of integrated financial statements. Objectives. Differences with historical analysis. Issues to consider. Step-by-step methodology. Generalising the models to include specific features. Tips and tricks. Balancing the balance sheet. Circular references. Consistency checking. Error elimination. Introduction to M&A modelling. Introduction to project finance modelling, and key measures and ratios.
- Cost of capital. Capital Asset Pricing Model. Weighted cost of capital. Leveraged and unleveraged cost of capital (classical and Modigliani-Miller approaches). Multi-factor models. Fama-French. Classical risk-return measures. Other measures of risk. Value-at-risk. Semi-deviation. Sharpe and Treynor ratios.
- Valuation principles and approaches in corporate finance. Comparables and asset-based approaches. Cash flow valuation. Advantages and disadvantages of each approach. Enterprise and equity valuations and conversions. Derivates approaches to corporate valuation. Annuities and value-driver formulas.
- Advanced cash flow valuation. Using annuities and terminal values effectively. Explicit forecast periods and best practices. Fade periods. Multi-stage terminal value periods and annuities. Using the Adjusted Present Value (APV) approach.
- Portfolio optimisation. Portfolio optimisation. Occurrence and objectives of optimisation in business and finance. Model calibration using optimisation. Markowitz model. Analytic and numerical solutions. Huang-Litzenberger formulas. Using Solver in Excel and VBA.
- Options and derivatives. Risk-neutral valuation. Options valuation. Black-Scholes’ formulae. Binomial trees. Random walks and Brownian motion. Simulation methods. Introduction to grid-based methods and finite differences. Introduction to sequential optimisation. Tree-based decision-making and real options.
- Credit-risk modelling. Vasicek and Merton formula. Default probabilities. Transition matrices. Portfolio losses. Capital requirements.
- Other financial products. Overview of modelling issues associated with other financial products (e.g. structured products, yield curves etc.).