Corporate and Project Finance Modeling Theory and Practice

A clear and comprehensive guide to financial modeling and valuation with extensive case studies and practice exercises

Corporate and Project Finance Modeling takes a clear, coherent approach to a complex and technical topic. Written by a globally-recognized financial and economic consultant, this book provides a thorough explanation of financial modeling and analysis while describing the practical application of newly-developed techniques. Theoretical discussion, case studies and step-by-step guides allow readers to master many difficult modeling problems and also explain how to build highly structured models from the ground up. The companion website includes downloadable examples, templates, and hundreds of exercises that allow readers to immediately apply the complex ideas discussed.

Financial valuation is an in-depth process, involving both objective and subjective parameters. Precise modeling is critical, and thorough, accurate analysis is what bridges the gap from model to value. This book allows readers to gain a true mastery of the principles underlying financial modeling and valuation by helping them to:

• Develop flexible and accurate valuation analysis incorporating cash flow waterfalls, depreciation and retirements, updates for new historic periods, and dynamic presentation of scenario and sensitivity analysis;
• Build customized spreadsheet functions that solve circular logic arising in project and corporate valuation without cumbersome copy and paste macros;
• Derive accurate measures of normalized cash flow and implied valuation multiples that account for asset life, changing growth, taxes, varying returns and cost of capital;
• Incorporate stochastic analysis with alternative time series equations and Monte Carlo simulation without add-ins;
• Understand valuation effects of debt sizing, sculpting, project funding, re-financing, holding periods and credit enhancements.

Corporate and Project Finance Modeling provides comprehensive guidance and extensive explanation, making it essential reading for anyone in the field.

Table of Contents

Part I: Financial Modeling Structure and Design: Structure and Mechanics of Developing Financial Models for Corporate Finance and Project Finance Analysis
Chapter 1: Financial Modeling and Valuation Nightmares: Problems That Financial Models Cannot Solve
Chapter 2: Becoming a Black Belt Modeler
Chapter 3: General Model Objectives of Structuring Transactions, Risk Analysis, and Valuation
Chapter 4: The Structure of Alternative Financial Models
Chapter 5: Avoiding Bad Programming Practices and Creating Effective Auditing Processes
Chapter 6: Developing and Efficiently Organizing Assumptions
Chapter 7: Structuring Time Lines
Chapter 8: Projecting Revenues, Expenses, and Capital Expenditures to Derive Pretax Cash Flow
Chapter 9: Moving from Pretax Cash Flow to After-Tax Free Cash Flow
Chapter 10: Adding Debt to a Corporate or Project Finance Model by Programming Cash Flow Waterfalls
Chapter 11: Alternative Calculations of Equity Distributions
Chapter 12: Putting Together Financial Statements and Calculating Income Taxes

Part II: Analyzing Risks with Financial Models: Sensitivity Analysis, Scenario Analysis, Break-Even Analysis, Time Series, and Monte Carlo Simulation
Chapter 13: Risk Assessment: The Centerpiece of All Valuation, Contracting, and Credit Issues in Finance
Chapter 14: Defining, Describing, and Assessing Risk in a Risk Allocation Matrix
Chapter 15: Presentation of Risk Analysis through Adding Sensitivity Analysis to Financial Models
Chapter 16: Using Financial Models to Establish Break-Even Points for Key Input Variables with Data Tables
Chapter 17: Constructing Flexible Scenario Analysis for Risk Assessment
Chapter 18: Generating Tornado Diagrams, Spider Charts, and Waterfall Graphs
Chapter 19: Adding Probabilistic Risk Analysis and Time Series Equations to Financial Models
Chapter 20: Taking the Mystery out of Applying Time Series Analysis and Monte Carlo Simulation in Financial Models
Chapter 21: Constructing Probability Distributions with Trends, Mean Reversion, Price Boundaries, and Correlations among Variables
Chapter 22: The Difficult Problem of Estimating Volatility, Mean Reversion, Time Trends, Correlations, and Price Boundaries from Historical Data or Market Data

Part III: Advanced Corporate Modeling: Modeling Terminal Value with Stable Ratios in the Discounted Cash Flow Model, Deriving Implied Multiples, and Computing the Bridge between Equity Value and Enterprise Value
Chapter 23: Overview of Issues When Computing Normalized Cash Flow and Terminal Value
Chapter 24: Computing the Return on Invested Capital for Historical and Projected Periods in Corporate Models
Chapter 25: Calculation of Invested Capital
Chapter 26: Complex Items in Balance Sheet Analysis: Deferred Taxes, Operating Cash, and Derivative Assets
Chapter 27: Four General Terminal Value Methods
Chapter 28: Terminal Value and Philosophy: Company Growth Rates and Overall Economic Growth
Chapter 29: Normalizing Terminal Year Cash Flows for Stable Working Capital Investment
Chapter 30: Relationship of Growth, Capital Expenditures, Depreciation, and Return on Investment
Chapter 31: Computing Normalized Deferred Tax Changes
Chapter 32: Terminal Value and the Ability of a Company to Earn Returns above the Cost of Capital
Chapter 33: Errors and Distortions in Applying the Value Driver Formula
Chapter 34: Computing Implied Price/Earnings Ratios for Use in Terminal Value Calculations
Chapter 35: Computing an Implied EV/EBITDA Ratio in Terminal Value Calculations
Chapter 36: Developing Value Drivers for P/E and EV/EBITDA Ratios with Benchmarking and Regression

Part IV: Complex Issues: Circular References and Other Complex Issues from Financial Structuring in Project Finance and Corporate Finance Models
Chapter 37: Resolving Circular References in Acquisition Models: Computing Interest Expense on the Average Balance of Debt
Chapter 38: Creating a Structured Cash Flow Process in a Corporate Model to Resolve Circular References
Chapter 39: Overview of Complex Project Finance Modeling Structuring Issues
Chapter 40: Funding Techniques in Project Finance and the Associated Circular Reference Problems
Chapter 41: Debt Sculpting in a Project Finance Model
Chapter 42: Automating the Goal Seek Process for Annuity and Equal Installment Repayments
Chapter 43: Modeling Debt Service Reserve Accounts
Chapter 44: Modeling Maintenance Reserve Accounts
Chapter 45: Refinancing and Valuing a Project Given Risk Changes over the Life of a Project
Chapter 46: Covenants and Cash Flow Sweeps in Project Finance Models
Chapter 47: Asset Portfolios, Progress Payments, and Lease Rolls in Real Estate Models