2009 In Review

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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.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.204  The cost of debt calculation is missing a reference, which causes an incorrect cost of debt to be calculated.  The final formula should read:

=IF(E2=”TV Year”,inputs_LTCostofD,IF(SUM(’Balance Sheet’!D31,’Balance Sheet’!E31,’Balance Sheet’!D35,’Balance Sheet’!E35)<=inputs_Precision,0,((E16*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 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.

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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.38-39 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.