In regards to other aspects of the training business there have been notable developments. The first is the publication of my fourth book: Financial Simulation Modeling in Excel: A Step-by-Step Guide, which was co-authored by my colleagues Michael Loh and Josh Laurito. Not only is this book an excellent addition to the Step-by-Step series published through Wiley Finance, but it marks the shift of delivering all electronic material through my website instead of CD-ROMs. This allows seamless delivery of electronic material to e-book readers.

Another development has been the addition of a course, which was piloted in 2011 with a private equity fund in New York City. This was largely a financial modeling course, but tailored to private equity fund investments and fund level analysis. It is the combination of updating nearly four years of our bestselling Corporate Financial Modeling course with private equity specific techniques used in my full-time investing position.

I look forward to updating many items on the website this year and disseminating information regarding our new course very shortly. As always, please feel free to contact me directly at keith.allman@enstructcorp.com if you have any questions.

Best regards,

Keith Allman

Financial Simulation Modeling in Excel contains a practical, hands-on approach to learning complex financial simulation methodologies using Excel and VBA as a medium. Crafted in an easy to understand format, this book is suitable for anyone with a basic understanding of finance and Excel. Filled with in-depth insights and expert advice, each chapter takes you through the theory behind a simulation topic and the implementation of that same topic in Excel/VBA in a step-by-step manner.

• Organized in an easy-to-follow fashion, this guide effectively walks you through the process of creating and implementing risk models in Excel. A companion website contains all the Excel models risk experts and quantitative analysts need to practice and confirm their results as they progress

Created for those with some background in finance and experience in Excel, this reliable resource shows you how to effectively perform sound financial simulation modeling, even if you’ve yet to do extensive modeling up to this point in your professional or academic career.

A critical guide to corporate valuation modeling. Valuation is at the heart of everything that Wall Street does. Every day, millions of transactions to purchase or sell companies take place based on prices created by the activities of all market participants. Corporate Valuation Modeling takes you step-by-step through the process of creating a powerful corporate valuation model. Each chapter discusses the theory of the concept, followed by Model Builder instructions that inform you of every step necessary to create the template model. Many chapters also include a validation section that shows techniques and implementations that you can employ to make sure the model is working properly.

• Walks you through the full process of constructing a fully dynamic corporate valuation model
• A Tool Box section at the end of each chapter assists readers who may be less skilled in Excel techniques and functions

Complete with a companion CD-ROM that contains constructed models, this book is an essential guide to understanding the intricacies of corporate valuation modeling.

The following discrepancies and errata have been reported in earlier versions of the text. Later versions may have these issues edited out. If you discover any yourself please forward them to info@enstructcorp.com.

p.48: Typo in cell D35, enter the following formula:  =C46/AVERAGE(C39:C45). Should read: In cell G46, enter the following formula:  =C46/AVERAGE(C39:C45)

p. 84  Model Builder 4.1, Step 10: The current text instructs readers to enter the following formulas in the corresponding cells:

E7:  =’Income Statement’!E5*Vectors!E19

E8: =’Income Statement’!E5*Vectors!E20

E9: =’Income Statement’!E5*Vectors!E21

The correct entries should be

E7:  =’Income Statement’!E7*Vectors!E20

E8: =’Income Statement’!E7*Vectors!E21

E9: =’Income Statement’!E7*Vectors!E22

p. 102  Model Builder 5.2, Step 4:  The formula uses the named range inputs_Capex1Dep.  The reader should make sure the following cells are named on the Assumptions sheet:

C17: inputs_Capex1Dep

C18: inputs_Capex2Dep

C19: inputs_Capex3Dep

C20: inputs_Capex4Dep

p. 104  Model Builder 5.2, Step 7:  The book and the CD-ROM copy and paste the formula instructed in that section, which uses the single named range inputs_Capex1Dep.  This should either be switched to a relative reference so that the reference changes for each Capex or each row on the Capex sheet where they are being used (13 through 16), should use inputs_Capex1Dep for row 13, inputs_Capex2Dep for row 14, etc.

p. 138  Model Builder 6.2, Step 2:  The current text uses a formula in E18 on the Debt sheet that is inconsistent with the model.  The correct formula that is represented in the CD-ROM model is:

=MAX(MIN(‘Income Statement’!E17-’Income Statement’!E19+’Income Statement’!E25-’Income Statement’!E28,E17),0)

p. 156  Model Builder 7.1, Step 7:  The current text instructs readers to enter the following formula in the corresponding cell:

D25: =SUM(D19:D21)

The correct entry is

D25: =SUM(D22:D24)

p. 153  Model Builder 7.1, Generally Applicable:  There are a few named ranges that have not been referenced in detail.  Just to make sure this is clear a section on the Assumptions sheet has cells named with the following names:

C24:  inputs_SuplusFundsRate

C25:  inputs_CashRate

C26:  inputs_MSRate

C27:  inputs_STFundsRate

D24:  inputs_SurplusFundsSpd

D25:  inputs_CashSpd

D26:  inputs_MSSpd

D27:  inputs_STFundsSpd

p. 158  Model Builder 7.1, Step 13:  The formula created here includes cell E39 as part of the sum.  This is a blank cell in the model and while it does not have any impact, it is not necessary to include.

p.190:  The free cash flow to the firm calculation is missing the intangible acquisition costs.  On the DCF sheet, after row 11 a row should be inserted called Intangible Acquisition Cost.  This is a cash expenditure item that reduces cash.  The formula should reference the Intangible sheet where the intangible acquisition cost is calculated.  The Free Cash Flow to the Firm calculation that was in row 12, which would be row 13 after inserting a row, needs to be adjusted so it includes the new reduction to FCFF.

p. 203  Model Builder 9.3, Step 2:  The formula for this step should be entered in E17, not E16 as the current text instructs.

p. 203  Model Builder 9.3, Step 3:  The text “Unsec. Rating” should be entered in I23, not L23 as the current text instructs.

p. 204  Model Builder 9.3, Step 6:  The text instructs users to enter the following formula:

=IF(E2=”TV Year”,inputs_LTCostofD,IF(SUM(‘Balance Sheet’!D31,’Balance Sheet’!E35 )<=inputs_Precision,0,((E15*AVERAGE(‘Balance Sheet’!D31:E31)+(Debt!E16*Debt!D53)+(Debt!E26*Debt!D54)+(Debt!D36 *Debt!D55))/(SUM(Debt!D53:D55)+AVERAGE(‘Balance Sheet’!D31:E31)))*(1-E6)))

The correct formula should be:

=IF(E2=”TV Year”,inputs_LTCostofD,IF(SUM(‘Balance Sheet’!D31,’Balance Sheet’!D35 )<=inputs_Precision,0,((E15*AVERAGE(‘Balance Sheet’!D31:E31)+(Debt!E16*Debt!D53)+(Debt!E26*Debt!D54)+(Debt!E36 *Debt!D55))/(SUM(Debt!D53:D55)+AVERAGE(‘Balance Sheet’!D31:E31)))*(1-E6)))

Notice that there are TWO changes in this formula (‘Balance Sheet’!D35) and (Debt!E36)

The Fed has purchased $308.5 billion in commercial paper and lent $631.8 billion under eight credit programs, most of which require appraisals of short-term debt and loan collateral by “major nationally recognized statistical ratings organizations.” That, in effect, means Moody’s Investors Service, Standard & Poor’s and Fitch Ratings.

It is foolhardy to rely on the three New York-based companies, said Keith Allman, chief executive officer of Enstruct Corp., which trains investors in financial modeling and asset valuation. The major raters issued top marks to $3.2 trillion in subprime mortgage-backed securities at the root of the financial crisis.

“They’re outsourcing the credit assessment to a group of people whose recent performance has been unbelievably bad,” said Allman, the New York-based author of three books on structured finance and a former vice president in Citigroup Inc.’s securitized markets unit. “If their goal is to not take a loss on these assets, they should be hiring independent analysts.”

Read more here.

Other related articles:

Fox joins battle cry for details of US bail-out

Fed Chairman Uses Incompetent Ratings Firms for Bailout

Four at Four: General Exhaustion

Forum – Wall Street Pit (USA Markets)

Keith Allman invited to speak on the opening panel: “THE CREDIT CRISIS AND LESSONS FOR SECURITIZATION IN CHINA” and invited to moderate a discussion on “COMPARING CHINA WITH OTHER EMERGING MARKETS.”

Please click here for more information.

Using a sophisticated mortgage-backed transaction as an example, the book jumps between excerpts from the legal documentation and the corresponding Excel formulas and code.

This book is particularly valuable for those who want to expand their knowledge of Visual Basic Applications (VBA) as there is extensive coding to create the loan-level amortization engine.

The included CD-ROM includes all code and the final model.

.

The following discrepancies and errata have been reported in earlier versions of the text. Later versions may have these issues edited out. If you discover any yourself please forward them to info@enstructcorp.com.

Chapter 2

p. 31 Step 14 instructs the reader to enter 1.50% for the margin, however the CD-ROM models leave this field blank. The corrected model files should have 1.50% entered for the margin to begin with.

p. 31 Step 10 instructs the reader to name a cell Age1. This will be fine for versions of Excel up to 2003, however it will not work for Excel 2007.

p.38 Step 14 the final F6 of the formula should be F6-AssetMarg1

p.38 the final formula in step 14 is created in such a way that the lifetime cap entered on the Assumptions sheet will never be exceeded, INCLUSIVE of the margin.  A more consistent implementation with the wording of the book is the following formula:

=IF(AssetIntType1=”Fixed”,AssetFxdRate1,IF(A7=1,OFFSET(Vectors!$D$6,A7,MATCH(AssetFltIndx1,lstInterestRates,0)),I

F(MOD($A7,AssetRateReset1)=0,MAX(MIN(OFFSET(Vectors!$D$6,A7,MATCH(AssetFltIndx1,lstInterestRates,0)),(F6-AssetMarg1)+AssetPdCapFl1,AssetLifeCap1),(F6-AssetMarg1)-AssetPdCapFl1,AssetLifeFloor1-AssetMarg1),F6-AssetMarg1)))+AssetMarg1

This formula only implements the lifetime cap on the index and then adds the margin.

p.38-39 Step 15 instructs the reader to enter a formula for the periodic payment. Originally the model was only going to be set to a fixed rate system, but to be more flexible it was created with a floating rate system and the text explains floating rate functionality. However, the complete formula was never picked up in the Model Builder, nor the text. The proper notional payment formula should read:

=IF(J6<=G6,H7+E7,IF(AssetIntType1=”Fixed”,-PMT(AssetFxdRate1*IF(A7=1,$C$7,$C$8),OrgTerm1,
AssetOrgBal1),-PMT(F7*C7,OrgTerm1-A6,E7)))

Notice that there is now an IF to define the Fixed versus Floating state. In the fixed state we assume the fixed rate and whatever the starting day count factor is. Most likely this will be 30/360, but be careful when using actual because it should represent what the loan was originated with. The second part requires the rate and day factor system to change over time (no dollar signs) AND that the term and balance change. This will create a variable payment within the terms specified.

p.49 Step 3 clear cells C7:AA7 instead of A7:AA7.

General – the named cell AssetTerm1 is used in the book and some Model Builder exercises. At some point it was changed to OrgTerm1, which is reflected in the final model. The names refer to the same thing, so either will do, just make sure to be consistent.

Chapter 3

p. 54 Step 6 should describe labeling row 4, not row 5.

Chapter 4

p. 62 Step 4 should instruct the reader to insert 23 in cell A69, not B68.

p. 67 The raw data file from Model Builder 4.2 – Raw Data has three additional months of data for every period. This can be deleted.

p. 68 Step 2 is unnecessary since the data is already copied down.

p. 76 Step 2 and 3 instruct the reader to enter multiple labels on rows 4 and 5. In the Model Builder and completed model these labels appear on rows 3 and 4. To make the model easier to tie to the completed model label use rows 3 and 4 for the labels.

p.78 Step 7 could confuse readers trying to get to the 3.33333333%. When entering =100/30 you will want to make sure this is a percent by modifying the formula to =(100/30)%. Or you could simply take the original formula and divide by 100.

p. 82 Step 13 instructs the reader to enter the formula =(L7-N7)*(1-O7/O6). This formula needs to be cleaned up in case the current balance is 0. The correct formula should be =IF(L7<=0,0,(L7-N7)*(1-O7/O6).

Chapter 7

p. 122 Step 16 instructs the reader to modify the formula by adding AX7+BH7-AV7 to the MIN statement in the beginning. This is correct, but the original AX7 must be removed. The final formula for AZ7 should read: =IF(OR(Z7, AB7,AC7),MIN(AX7+BH7-AV7,CB6),IF(LiabPrinType1=”Sequential”,MIN((N7+Q7+R7),CB6),MIN((N7+Q7+R7)*LiabAdvRate1,CB6)))

Chapter 8

p.134 The formula for modified duration in the book and Project Model Builder is:=1/((1+E5/12))*(SUMPRODUCT(E16:E375,$A$16:$A$375)/(12*E4)). The correct formula should reference the BEY, not the monthly yield. To do this simply change the formula to:=1/((1+E7/12))*(SUMPRODUCT(E16:E375,$A$16:$A$375)/(12*E4))

General Notes

The waterfall in the example model created from this text is set to change by selecting different periodicities. However, the Analytics sheet and the Output sheet are set to monthly periodicity. If you would like to make them completely dynamic then you would need to replace the hard coded divisors with divisors from the periodicity references created on the Hidden sheet.

Also related to periodicity there is an error on the Hidden sheet where “Semi Annual” is missing the hypen.  This causes a problem when selecting that periodicity because the formula is coded with a hyphen.  The periodicity reverts to annual.  To correct this make the list the same as the formula, either removing or adding a hyphen where necessary.

On the Output sheet there are a couple of columns where the OFFSET function did not get copied over. This should be copied over for all sections that rely on referencing periods selected by the user on the Inputs sheet.