Finance & Investments · Term 3

Financial Modelling

Master the four pillars of financial modelling: Relative Valuation (Comps), Discounted Cash Flow (DCF), the Integrated 3-Statement Model, and the LBO Financial Model. 15 sessions of hands-on Excel work.

Course Materials 15 Sessions Excel-Based 40% Group Model 40% Final Exam

Block 1 - Relative Valuation (Sessions 1–4)

4 Sessions

Session 1

Lecture + Case

Relative Valuation - Intro & P/E

What are multiples? P/E ratio mechanics, normalization, and first case study.

1

Session 2

Lecture + Case

EV/EBITDA & Market Comps

Enterprise Value multiples, building a comps table, ACS / FCC / ACCIONA case.

2

Session 3

Lecture + Case

PEG Ratio & Growth Multiples

PEG, EV/EBITDA Growth, Central Electrical plc case study.

3

Session 4

Full Case

Relative Valuation - Full Case

Ferrari, Iberdrola, Mobily valuation range case studies. Buy/Sell/Hold.

4

Block 2 - DCF Models (Sessions 5–8)

4 Sessions

Session 5

Pending

Free Cash Flow & FCFF

Materials not yet uploaded. Coming soon.

5

Session 6

Pending

WACC Components

Materials not yet uploaded. Coming soon.

6

Session 7

Pending

Terminal Value Methods

Materials not yet uploaded. Coming soon.

7

Session 8

Pending

DCF Model & Football Field

Materials not yet uploaded. Coming soon.

8

Block 3 - 3-Statement Model (Sessions 9–12)

4 Sessions

Session 9

Pending

3-Statement Model - Intro

Materials not yet uploaded. Coming soon.

9

Session 10

Pending

Income Statement Forecast

Materials not yet uploaded. Coming soon.

10

Session 11

Pending

Balance Sheet & Cash Flow

Materials not yet uploaded. Coming soon.

11

Session 12

Pending

3-Statement - Full Build

Materials not yet uploaded. Coming soon.

12

Block 4 - LBO Model (Sessions 13–14)

2 Sessions

Session 13

Pending

LBO Mechanics & Deal Assumptions

Materials not yet uploaded. Coming soon.

13

Session 14

Pending

LBO Model & Exit IRR

Materials not yet uploaded. Coming soon.

14

Session 15

Exam

Final Exam

Computer-based cumulative exam. 40% of final grade.

15

Block 1 · Sessions 1–4

Relative Valuation - Introduction & P/E Ratio

The quickest and most widely used valuation methodology. Learn to select comparables, pick the right multiples, and build dynamic comps models in Excel.

P/E Ratio EPS Comparables Normalization

P/ECore Multiple

≃15–20xTypical P/E Range

EPSEarnings Per Share

CompsComparable Companies

3 StepsMethodology

What is Relative Valuation?

Foundation

📈 The Core Idea - Pricing by Analogy

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Relative Valuation (also called Comps or Multiples Analysis) asks a simple question: What are similar companies worth, and what does that imply for our target?

📗

Definition: Relative Valuation estimates a company's value by comparing it to a peer group using standardised ratios (multiples). If comparable companies trade at 15x earnings, we apply that multiple to our target's earnings to infer a market-implied value.

It is the fastest and most widely used valuation methodology in practice - used daily by equity analysts, investment bankers, and private equity professionals. Its power lies in its simplicity and market-grounding. Its weakness is that it cannot identify absolute value - it only tells you if something is cheap or expensive relative to peers.

⚠️

Key Limitation: If the entire sector is overvalued, Comps will tell you something is "fair" when it is in fact overpriced. Relative does not mean absolutely cheap - it means cheap vs. peers.

📝 Three Steps to Relative Valuation

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Every relative valuation follows the same three-step process:

#	Step	What You Do	Key Judgment
1	Select Comparables	Identify 5–15 companies with similar business model, size, geography, and growth profile	Similarity quality beats quantity - 5 tight comps beat 20 loose ones
2	Choose Multiples	Pick the most relevant ratio(s): P/E for profitable companies; EV/EBITDA for capital-heavy or leveraged firms; EV/Sales for unprofitable growth companies	The multiple must be meaningful for the sector
3	Apply & Interpret	Calculate the median/mean multiple of the comp set; apply to the target's metric; triangulate with DCF	Use a range, not a single point. Report sensitivity.

✅

Best Practice: Always use the median (not mean) of your comp set to avoid distortion from outliers. Report both an average and a high/low range so the audience understands the spread.

🔧 Types of Multiples - Equity vs. Enterprise Value

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Multiples fall into two families depending on whether they reference Equity Value or Enterprise Value (EV):

Category	Multiple	Numerator	Denominator	Best Used For
Equity	P/E	Market Cap (Price × Shares)	Net Income (or EPS)	Profitable companies; mature sectors
Equity	P/BV	Market Cap	Book Value of Equity	Banks, financial institutions
Equity	P/CF	Market Cap	Operating Cash Flow	Capital-light businesses
Enterprise	EV/EBITDA	EV = Mkt Cap + Net Debt	EBITDA	Capital-heavy; cross-capital-structure comps
Enterprise	EV/EBIT	EV	EBIT	When D&A differences matter less
Enterprise	EV/Sales	EV	Revenue	Unprofitable companies; high-growth tech

📄

Exam Tip: EV multiples are capital-structure neutral - they work regardless of whether a company is funded with debt or equity. P/E multiples are after interest expense, so leverage distorts comparisons between companies with different debt levels. Always use EV multiples when comparing companies with different leverage.

The P/E Ratio in Depth

Core Multiple

🐾 P/E Formula & Mechanics

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The Price-to-Earnings ratio is the most widely cited valuation multiple. It tells you how many euros/dollars the market is paying for each euro/dollar of annual net earnings.

P/E Ratio = Market Price per Share / Earnings per Share (EPS) = Market Capitalisation / Net Income -- If P/E = 20x, investors pay €20 for every €1 of annual earnings -- EPS = Net Income / Number of Shares Outstanding Implied Market Price = EPS × Peer Group P/E (median)

A high P/E implies the market expects strong future growth. A low P/E may suggest the market is pessimistic about growth prospects, OR that the company is genuinely undervalued relative to peers.

IntuitionThe P/E is essentially the payback period - how many years of current earnings would it take to "pay back" the purchase price if earnings stayed constant? A P/E of 15x = 15 years of static earnings. Of course, earnings grow (or shrink), so the actual payback differs.

⚠ Normalization Adjustments - Why Raw Earnings Mislead

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Raw reported net income often contains one-off items that distort the true recurring earnings power. Normalization adjusts for these before calculating multiples.

Adjustment Type	Example	Direction
Restructuring charges	Factory closure costs booked in Year 1	Add back (unusual cost)
Asset write-downs	Goodwill impairment not cash	Add back
Gains on asset sales	Sold subsidiary above book value	Deduct (non-recurring gain)
Litigation settlements	One-time legal payout	Add back
Stock compensation (SBC)	Executive share awards expensed	Judgment call - real cost?
Change in accounting policy	Revenue recognition restatement	Restate to consistent basis

⚠️

Why this matters: A company that books a €500M write-down will show a much lower P/E than peers if you use reported earnings. After normalization, the distortion disappears. Always use Adjusted EPS or Underlying EPS in your comps table.

📊 LFY vs. NTM - Which Earnings to Use?

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Analysts track multiples on three time horizons - each tells a different story:

Notation	Meaning	Useful For	Risk
LFY	Last Full Year (actual, audited)	Clean historical anchor; no forecast error	Backward-looking; may not reflect today's business
LTM	Last Twelve Months (trailing)	Most current; includes recent quarters	Mix of old + new accounting periods
NTM / NTM+1	Next Twelve Months (forward)	Forward-looking; prices in expectations	Consensus errors; analyst optimism bias

Course NoteIn practice, investment banks build comps tables showing LFY, NTM (Year 1E), and NTM+1 (Year 2E) simultaneously. A falling forward P/E (NTM lower than LFY) signals the market expects strong earnings growth. A rising forward P/E signals earnings decline or re-rating risk.

Case Study - P/E Ratio Valuation

Excel Exercise

A

Company A

Comparable #1 - Construction Sector

Net Income: €608.66M · Shares: 350M · Market Price: €36.68 → P/E = 21.1x

B

Company B

Comparable #2 - Construction Sector

Net Income: €421.4M · Shares: 155M · Market Price: €60.35 → P/E = 22.2x

C

Company C

Target Company - To be Valued

Net Income: €324M · Shares: 60M · Current price unknown → Value using peer P/E

🔨 Step-by-Step: Calculating the Peer P/E

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Using the data from the class Excel file, follow this sequence:

Step 1 - Calculate EPS for each comparable: EPS (A) = €608.66M / 350M shares = €1.74 per share EPS (B) = €421.40M / 155M shares = €2.72 per share Step 2 - Verify against market price: P/E (A) = €36.68 / €1.74 = 21.1x P/E (B) = €60.35 / €2.72 = 22.2x Step 3 - Calculate Average Peer P/E: Average P/E = (21.1 + 22.2) / 2 = 21.6x Step 4 - Apply to Company C: EPS (C) = €324M / 60M shares = €5.40 per share Implied Price = €5.40 × 21.6x = €116.64 per share

✅

Conclusion: Based on the P/E multiple approach, Company C's implied market price is approximately €116.64 per share. If the current market price differs, this signals a potential mispricing opportunity.

📋 Building the Comps Table in Excel

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A properly structured Excel comps table is the deliverable. Always format it consistently:

Company	Net Income (€M)	Shares (M)	EPS (€)	Market Price (€)	P/E (x)
Company A	608.66	350	1.74	36.68	21.1x
Company B	421.40	155	2.72	60.35	22.2x
Average	-	-	-	-	21.6x
Company C (target)	324.00	60	5.40	?	→ €116.64

Excel FormulaIn Excel: Implied Price = =EPS_C * AVERAGE(PE_A:PE_B). Always reference the average cell dynamically rather than hardcoding 21.6x. This way the model updates automatically if new comparables are added.

Slide Exercises - from the course Deck

In-Class

🔢 Exercise 1 - P/E: Buy or Sell?

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📄

Slide 19 - In-class exercise. Company B currently has a P/E of 50x.

Question A: If the historical average P/E for Company B is 12x, should you buy or sell?

Relative PE (vs own history) = Current PE / Historical PE = 50 / 12 = 4.17x Relative PE > 1 → Company is trading ABOVE its historical average Signal: SELL - the stock looks expensive vs its own history.

Question B: If the industry average P/E is 11x, should you buy or sell?

Relative PE (vs sector peers) = Company PE / Industry PE = 50 / 11 = 4.55x Relative PE > 1 → Company trades at a premium to its peers Signal: SELL - significantly overvalued vs sector.

⚠️

Key concept - Relative P/E: A Relative P/E above 1.0 means the company is more expensive than its reference benchmark (peers or own history). A Relative P/E below 1.0 signals potential undervaluation. Always ask why the premium or discount exists before acting.

🔢 Exercise 2 - Non-Recurring Items & Normalisation

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📄

Slide 22 - In-class exercise. Adjusted P/E = Market Cap / Normalised Net Income. Calculate the normalised net income assuming a 30% tax rate.

P&L Item	Reported (€M)	Adjustment	Normalised (€M)
Restructuring costs	(50)	Add back - non-recurring	-
Profit Before Tax	100	→ Restated PBT	150
Tax (30%)	(30)	30% × 150	(45)
Net Income	70	Normalised	105

Reported Net Income: PBT 100 − Tax 30 = €70M Normalised Net Income: PBT (100 + 50 restructuring) = 150 Tax = 150 × 30% = 45 Normalised NI = 150 − 45 = €105M Impact on P/E: If Market Cap = €1,050M: Reported P/E = 1,050 / 70 = 15.0x (distorted - too high) Normalised P/E = 1,050 / 105 = 10.0x (true picture)

✅

Lesson: Always use Normalised / Adjusted EPS in your comps table. A one-off restructuring charge of €50M inflated the P/E from 10x to 15x - a 50% distortion that would lead you to wrongly classify the stock as expensive.

🌎 Real-World P/E Context - What the Market Pays

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The course's slides include Bloomberg market multiple snapshots (Slides 25–27). Key observations from real market data:

Course Context"Almost 85% of equity research reports are based on multiples and comparables. More than 50% of all acquisition valuations are based on multiples. Rules of thumb based on multiples are not only common, but are often the basis for final valuation judgments." - Slide 9

Sector	Typical P/E Range	Typical EV/EBITDA	Why the difference?
Technology / Growth	25–50x+	15–25x	High growth expectations priced in
Consumer Staples	18–25x	12–16x	Defensive earnings quality premium
Industrials	14–18x	8–12x	Cyclicality discounts peak earnings
Utilities	12–16x	7–10x	Regulated, predictable but slow growth
Banks / Financials	8–14x	N/A (use P/BV)	Leverage is the business model - EV meaningless
Loss-making / Early stage	N/A	N/A	Use EV/Revenue or EV/MAU

⚠️

Slide 20 - Course Warning: P/E ratios fluctuate dramatically with macro cycles. In 2020 US tech stocks (Nasdaq 100) traded at extreme P/E premiums driven by COVID-era digitisation tailwinds. Amazon posted record profits at the height of the pandemic. Always question whether market multiples reflect sustainable earnings or a temporary distortion.

🔎 When NOT to Use P/E - Key Limitations

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From the slides, the course lists explicit cases where P/E breaks down:

Situation	Problem	Alternative
Loss-making company	Negative EPS → P/E is meaningless	EV/Revenue, EV/Gross Profit
Non-recurring items in earnings	Distorts "true" earnings power	Normalised/Adjusted P/E
Different leverage levels	Interest expense distorts net income	EV/EBITDA (capital-neutral)
Different tax rates (cross-border)	Tax differences inflate/deflate EPS	EV/EBIT or EV/EBITDA
Financial companies (banks, insurance)	Debt is their raw material, not leverage	P/BV, P/E on normalised basis
High-growth / pre-profit	EPS tiny or negative; multiple explodes	EV/Revenue, EV/MAU, PEG

Block 1 · Sessions 1–4

EV/EBITDA & Building Market Comps

Enterprise Value multiples remove the distortion of capital structure. Learn to compute EV, build a comps table with both P/E and EV/EBITDA, and make a Buy/Sell/Hold recommendation.

Enterprise Value EV/EBITDA Net Debt ACS · FCC · ACCIONA

EVEnterprise Value

EBITDAEarnings Before DA&A

7–10xTypical EV/EBITDA

ΔDebtKey Lever

3Comparables

Enterprise Value - The Capital-Neutral Measure

Concept

🏠 What is Enterprise Value (EV)?

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Enterprise Value represents the total economic value of a business - what it would cost to buy the entire company, repay all debt, and pocket the cash. It is capital-structure neutral because it includes both debt and equity holders' claims.

Enterprise Value (EV) = Market Capitalisation + Net Debt Net Debt = Total Financial Debt − Cash & Equivalents Alternatively: EV = Market Cap + Total Debt + Preferred Stock + Minority Interest − Cash -- EV answers: "What is the total price tag of the business?" --

📗

Why EV beats Market Cap for comparisons: Two identical businesses generating the same EBITDA will have different Market Caps if one is heavily leveraged. EV normalises for this, giving you the true operating value regardless of financing decisions.

📈 EV/EBITDA - Why Analysts Love It

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EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortisation) is a proxy for operating cash flow before capex. It strips out financing costs and accounting choices.

EV/EBITDA = Enterprise Value / EBITDA EBITDA = EBIT + Depreciation + Amortisation = Net Income + Interest + Taxes + D&A -- Typical ranges: Utilities 7–9x · Industrials 8–12x · Tech 15–25x+ --

Advantage	Limitation
Capital-structure neutral (includes debt)	EBITDA ≠ cash flow (ignores capex)
Unaffected by depreciation policy differences	Can flatter capital-intensive businesses
Works across geographies (no tax rate differences)	Excludes working capital changes
Useful for leveraged companies (LBOs)	Not applicable to financial companies

Case Study - ACS, FCC & ACCIONA

Excel Exercise

ACS

ACS Group

Comparable #1 - Spanish Construction

Net Debt: €3,000M · EBITDA: €1,095.5M · Net Income: €608.66M

FCC

FCC Group

Comparable #2 - Spanish Construction

Net Debt: €2,000M · EBITDA: €975M · Net Income: €421.4M

ACC

ACCIONA

Target Company - To be Valued

Net Debt: €2,300M · EBITDA: €743M · Net Income: €324M · Shares: unknown

🔨 Step-by-Step: EV/EBITDA Valuation of ACCIONA

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The Excel model requires you to fill in EV, EV/EBITDA, then back-calculate ACCIONA's equity value and implied stock price:

Step 1 - Calculate EV for Comparables:

(EV = Market Cap from the model + Net Debt)
EV (ACS)  = Market Cap_ACS  + €3,000M
EV (FCC)  = Market Cap_FCC  + €2,000M

Step 2 - Calculate EV/EBITDA for each comp:

EV/EBITDA (ACS) = EV_ACS / €1,095.5M
EV/EBITDA (FCC) = EV_FCC / €975.0M

Step 3 - Average EV/EBITDA:

Average = AVERAGE(EV/EBITDA_ACS, EV/EBITDA_FCC)

Step 4 - Estimate ACCIONA's EV:

ACCIONA EV  = Average Multiple × ACCIONA EBITDA (€743M)

Step 5 - Back out Equity Value:

ACCIONA Equity  = ACCIONA EV  − Net Debt (€2,300M)
Value per Share = Equity / Number of Shares

📄

Key Excel Insight: In the model file, the Market Cap for each company is calculated via a separate cell (shares × price). The EV formula then adds Net Debt to that computed Market Cap. This is a dynamic model - changing the market price automatically recalculates EV and the implied peer multiple.

📋 Combined Comps Table - P/E + EV/EBITDA

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Best practice is to present multiple multiples in a single comps table, showing LFY, Year 1 (E) and Year 2 (E) for each:

Company	Mkt Cap (€M)	P/E LFY	P/CF LFY	P/BV LFY	EV/EBITDA LFY
Company A plc	11,342	14.5x	4.5x	-	9.0x
Company B plc	21,488	10.1x	2.7x	-	8.5x
Company C plc	19,133	9.7x	2.6x	-	7.6x
Average	-	11.4x	3.3x	-	8.4x
Target (ACCIONA)	?	→ Apply	→ Apply	-	→ Apply

Buy / Sell / Hold FrameworkAfter computing the implied value using each multiple: if the implied price exceeds the current trading price, the stock appears undervalued → BUY. If the implied price is below current price → SELL. Within a ±10% band → HOLD. Always present a range, not a single number.

Exercise 3 - Omnitel / Mannesmann (EV/EBITDA)

Slide 29

🔢 Exercise 3 - Value Omnitel using EV/EBITDA

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📄

Slide 29 - In-class exercise. Calculate the equity value of Omnitel, an unlisted Italian telecoms company, using Mannesmann as the benchmark comparable. Mannesmann EV/EBITDA = 15x. Omnitel forecasted EBITDA = €1,600M. Forecasted Net Debt = €1,000M.

Step 1 - Apply the peer multiple to get implied EV: Peer EV/EBITDA = 15x (Mannesmann - benchmark) Omnitel EBITDA = €1,600M Implied EV = 15 × €1,600M = €24,000M Step 2 - Deduct Net Debt to get Equity Value: Equity Value = Implied EV − Net Debt = €24,000M − €1,000M = €23,000M -- This is what Omnitel's equity is worth to a buyer -- -- using Mannesmann as the market reference point --

✅

Real-world context: This type of analysis is used daily in M&A. When Vodafone acquired Mannesmann in 2000 for ~€180 billion (the largest M&A deal in history at the time), EV/EBITDA multiples for European telecoms were at peak levels. The exercise illustrates how EV/EBITDA bridges from an observable comparable to the unobservable value of a private target.

📉 Real Comps - European Banks (Slides 33)

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from the course slides - a real European banking sector comps table illustrating P/E, P/BV, Dividend Yield, ROE and Payout. Notice how banks use P/BV rather than EV/EBITDA.

Company	P/E FY1	P/BV FY1	Div Yield	ROE FY1	Payout
Societe Generale	10.4x	1.8x	3.96%	16.99%	41.2%
BNP Paribas	9.7x	1.5x	3.29%	15.54%	32.0%
UBS	12.3x	2.8x	3.21%	22.32%	39.6%
Deutsche Bank	12.5x	1.3x	2.49%	10.01%	31.2%
ABN Amro	8.6x	1.9x	5.39%	22.28%	46.6%
BBVA	14.5x	2.7x	3.38%	18.84%	49.0%
Banco Santander	12.6x	2.1x	3.63%	16.46%	45.5%
Barclays	10.3x	2.0x	4.35%	19.35%	44.6%
HSBC Holdings	14.2x	2.3x	4.12%	16.02%	58.5%
Lloyds TSB	10.4x	2.4x	7.94%	23.28%	82.6%

Why P/BV for Banks?Banks hold financial assets on their balance sheet at book value - loans, bonds, derivatives. Book equity is a meaningful measure of their net worth. ROE (Return on Equity) drives P/BV: a bank earning 20%+ ROE deserves a P/BV above 2x; a bank earning 5% ROE may trade below book (P/BV < 1x). P/BV and ROE move together - high ROE commands high P/BV premium.

⚡ Real Comps - European Utilities (Slide 34)

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Utilities use EV/EBITDA as the primary multiple because of massive D&A charges on regulated assets. The Net Debt/EBITDA column is critical - it shows the leverage capacity of each utility's regulated cash flows.

Company	P/E FY1	EV/EBITDA	Net Margin	Net Debt/EBITDA	Div Yield
Suez	15.6x	5.3x	4.2%	2.2x	4.1%
E.ON AG	11.5x	5.1x	9.5%	0.7x	3.6%
RWE AG	10.4x	4.5x	5.2%	1.9x	3.6%
Endesa	11.7x	6.8x	8.5%	3.4x	4.5%
Gas Natural	15.6x	9.1x	9.7%	2.0x	3.2%
Iberdrola	13.6x	9.4x	11.4%	3.8x	4.1%
International Power	20.2x	13.8x	12.0%	7.3x	1.6%
Scottish Power	10.2x	7.1x	10.2%	2.7x	5.5%
Red Electrica	14.9x	8.4x	13.5%	4.2x	4.1%
Enel	14.7x	6.6x	9.7%	2.2x	8.8%

✅

Reading this table: Iberdrola and Gas Natural trade at the highest EV/EBITDA multiples (9–9.4x) reflecting their premium renewable and infrastructure assets. International Power at 13.8x EV/EBITDA with 7.3x Net Debt/EBITDA shows maximum leverage - high returns but tight margin for error. E.ON at 0.7x leverage is the most financially conservative.

📈 Net Debt / EBITDA - Leverage Benchmark

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From Slide 32 - Net Debt/EBITDA is not a valuation multiple but a credit metric that appears alongside EV/EBITDA in every real comps table. It measures how much leverage the company carries relative to its operating earnings.

Net Debt / EBITDA = (Total Debt − Cash) / EBITDA -- Answers: "How many years of EBITDA does it take to repay all debt?" -- Typical leverage benchmarks: < 1.0x → Low leverage - strong balance sheet 1–2x → Moderate - investment grade territory 2–4x → Elevated - watch carefully 4–6x → High - LBO / distressed territory > 6x → Very high - covenant risk

📗

In comps tables: Net Debt/EBITDA is always shown alongside EV/EBITDA because it tells you whether the peer's EV multiple reflects a clean or leveraged balance sheet. A company with EV/EBITDA of 8x and Net Debt/EBITDA of 1x is very different from one at 8x with 5x leverage - same multiple, completely different risk profile.

📋 Other Multiples - P/S, P/BV, Dividend Yield

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Multiple	Formula	Advantage	Drawback
P/S (Price/Sales)	Market Cap / Revenue	Works even for loss-making or distressed companies - sales always positive. Essential for pre-profit startups.	High sales ≠ high profit. A company with €1Bn revenue but 1% margins is worth far less than one with 30% margins.
P/BV (Price/Book)	Market Cap / Book Equity	Anchors valuation to accounting net worth. Standard for banks and asset-heavy businesses.	Book value is an accounting construct - can be distorted by write-downs, goodwill, or aggressive depreciation policies.
Div Yield	DPS / Market Price	Direct measure of cash return to shareholders. Key metric for income investors in utilities and telcos.	High yield can signal distress (price has fallen) rather than generosity. Always check payout ratio sustainability.

Course Note - Slide 30"Studies find P/S ratios (like P/E and P/BV) are negatively related to long-run average stock returns." High P/S = high growth expectations already priced in. Low P/S = the market is pessimistic. Value investors hunt for low P/S with improving margins - the combination of cheap price and operational recovery is a powerful return driver.

Block 1 · Sessions 1–4

PEG Ratio & Growth Multiples

The P/E ratio ignores growth. The PEG ratio fixes this by adjusting for expected earnings growth - a company growing at 30% per year deserves a higher P/E than one growing at 5%.

PEG Ratio EV/EBITDA Growth Central Electrical plc Growth Rates

PEGPE / Growth Rate

<1.0xPotentially Undervalued

1.0xFair Value Rule of Thumb

>2.0xPotentially Overvalued

CAGR2-Year Growth Used

The PEG Ratio - Adjusting P/E for Growth

Core Concept

📈 PEG Formula & Intuition

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The Price/Earnings to Growth (PEG) ratio was popularised by Peter Lynch (Fidelity Magellan Fund) as a quick screen to identify growth companies trading at reasonable valuations.

PEG Ratio = P/E Ratio / Estimated Earnings Growth Rate (%) -- Growth rate: compound annual growth in net income over the next 2 years -- Growth Rate (CAGR) = (Net Income t+2 / Current Net Income) ^ (1/2) − 1 Example: Current NI = €100M, NI in 2 years = €121M CAGR = (121/100)^0.5 − 1 = 1.1 − 1 = 10% If P/E = 20x → PEG = 20/10 = 2.0x

PEG Value	Interpretation	Action Signal
< 0.5x	Significantly undervalued relative to growth	Strong Buy signal
0.5x – 1.0x	Potentially undervalued	Buy signal
1.0x	Fair value (growth = price paid)	Hold / Neutral
1.0x – 2.0x	Potentially overvalued	Sell / Underweight
> 2.0x	Significantly overvalued	Strong Sell signal

⚠️

PEG Limitations: The 1.0x benchmark is a rule of thumb, not a law. Different sectors have different fair-value PEGs. High-quality businesses with durable competitive advantages often trade above PEG 1.0x for extended periods. Always compare PEG to sector peers, not an absolute benchmark.

📄 Case Study - Central Electrical plc (Worked Solution)

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From the class Excel file (CaseStudy1_Summary). Central Electrical plc has three comparable companies A, B, C. The task is to compute a range of multiples and issue a Buy/Sell/Hold recommendation.

Company	Mkt Cap (€M)	P/CF LFY	P/CF Y1(E)	P/CF Y2(E)	P/BV LFY	EV/EBITDA LFY
Company A plc	11,342	14.5x	13.8x	12.9x	4.5x	9.0x
Company B plc	21,488	10.1x	9.8x	8.6x	2.7x	8.5x
Company C plc	19,133	9.7x	9.2x	9.0x	2.6x	7.6x
Average	-	11.4x	10.9x	10.2x	3.3x	8.4x

The Recommendation FrameworkCompute implied value of Central Electrical plc using each multiple × the corresponding metric. You will get a range of values - typically €X–Y per share. Compare this range to the current market price. If the midpoint of all implied values is significantly above the current price: BUY. Significantly below: SELL.

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Excel Tips for the Case: (1) Build EBITDA from the P&L schedule provided: Sales × EBITDA margin. (2) Calculate Net Debt from the balance sheet. (3) EV = Market Cap + Net Debt. (4) The model includes a 5-year forecast - use average forecast multiples. (5) Sensitivity table varying the assumed multiple by ±1x shows how sensitive your recommendation is.

🎯 PEG Case - CaseStudy2 from Excel File

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The second PEG case study tracks a company's Market Cap and Net Income from 2024 through 2029:

Year	2024	2025	2026	2027	2028	2029
Market Cap (€M)	701.9	743.2	976.4	1,073.7	988.8	1,343.1
Net Income (€M)	-7.2	6.4	12.2	16.5	26.5	26.3
P/E Ratio	n.a.	116.1x	80.0x	65.1x	37.3x	51.1x

PEG Calculation for 2025 base year: Net Income Growth (CAGR over 2 years): = (NI_2027 / NI_2025) ^ (1/2) − 1 = (16.5 / 6.4) ^ 0.5 − 1 = 2.578 ^ 0.5 − 1 = 1.606 − 1 = 60.6% CAGR PEG = P/E_2025 / Growth Rate = 116.1x / 60.6 = 1.91x → Potentially Overvalued

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Why 2024 P/E is n.a.: Net Income is negative in 2024 (−€7.2M). A negative earnings figure makes P/E mathematically meaningless (and economically misleading). In such cases, switch to EV/Revenue or EV/Gross Profit instead.

Annex - Growth Ratios & Investing Strategies

Slides 42–43

🎯 Three Classic Investing Strategies & Where PEG Sits

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From Slide 43 - the course frames PEG within the classic debate between Value and Growth investing:

Strategy	Investor Mantra	Primary Signal	Risk
Value	"I buy companies trading at a cheap price"	Low P/E ratio	Value traps - cheap for a reason (declining business)
Growth	"I buy companies growing rapidly"	High earnings growth rate	Overpaying - buying growth already priced in
GARP (Growth at a Reasonable Price)	"I want fast growth but won't overpay for it"	PEG ratio < 1.0x	Growth estimates may be wrong - analyst optimism bias

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PEG = the GARP investor's tool. Peter Lynch (Fidelity Magellan Fund, one of the best-performing funds in history) popularised PEG as a way to find companies growing rapidly but trading below what that growth is worth. He famously said a company fairly priced should have a PEG of 1.0x - you pay 1x per unit of growth.

📈 PEG - Exact Formula from the Slides

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Slide 42 - Official Formula: PEG = PE / (Long term EPS growth over 2 years × 100)

PEG = PE Ratio ───────────────────────────────────────────── Long-term EPS growth (2 years, expressed as %) Important: Growth rate goes in as a percentage, NOT a decimal Example: 20% growth → use 20, not 0.20 If PE = 30 and 2-year EPS CAGR = 20%: PEG = 30 / 20 = 1.5x If PE = 15 and 2-year EPS CAGR = 20%: PEG = 15 / 20 = 0.75x ← potentially undervalued EPS CAGR (2-year) = (EPS_t+2 / EPS_t)^0.5 − 1 (then × 100 for %)

Course Framing - Slide 42"A good way to help decide if PE is too high or too low for that company. PEG multiples are created by comparing a company's PE ratio to its underlying growth rate in EPS. The lower the ratio, the cheaper you can purchase the earnings for."

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Common exam mistake: Using the growth rate as a decimal (0.20) instead of a percentage (20) in the PEG formula. If you use 0.20, your PEG will be 100× too high (PEG = 30/0.20 = 150x instead of 1.5x). Always express the growth rate as a percentage figure.

📱 Operating Multiples - EV/MAU for Tech & Social Networks

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From Slides 39–41 (Annex 1 in the deck). When companies are pre-profit or their value is driven by user engagement rather than earnings, traditional multiples fail. Analysts use operating metrics instead.

Multiple	Formula	Used For
EV/MAU	EV ÷ Monthly Active Users	Social networks (Meta, Snapchat, TikTok)
EV/DAU	EV ÷ Daily Active Users	High-engagement platforms (gaming, messaging)
EV/Subscriber	EV ÷ Paying Subscribers	Streaming (Netflix, Spotify)
EV/GMV	EV ÷ Gross Merchandise Value	Marketplaces (Amazon, eBay, Shopify)

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The WhatsApp Deal - Slide 41: In February 2014, Facebook acquired WhatsApp for $19 billion. WhatsApp had ~450 million users but minimal revenue. At the time: EV/MAU ≈ $42 per user. Facebook justified the price because each user was potentially worth far more through future monetisation. This is the logic behind operating multiples - you're paying for the user base today, betting on monetisation tomorrow.

Key Logic - Slides 39–40"Rising user engagement leads to more new user growth, which should result in more recurring, predictable revenue." The EV/MAU multiple collapses the entire user monetisation thesis into a single number - you're paying $X per user and implicitly assuming the company can convert those users into $Y of lifetime value.

Block 1 · Sessions 1–4

Relative Valuation - Full Case Studies

Applying all four blocks of multiples simultaneously: P/E, P/CF, P/BV, and EV/EBITDA across Ferrari, Iberdrola, and Mobily. Building a complete Valuation Range output.

Ferrari NV Iberdrola Mobily (Saudi) Valuation Range

3Case Studies

4Multiples Used

RangeOutput Format

B/S/HFinal Recommendation

Ferrari, Iberdrola & Mobily - Case Overview

Full Case

🏎 Ferrari NV - Luxury Auto Comps Challenge

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Ferrari is one of the most discussed valuation puzzles in finance. It consistently trades at premiums far above other automotive companies because the market prices it as a luxury goods company, not a car manufacturer.

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The Ferrari Comps Problem: Who are Ferrari's comparables? If you use Volkswagen, BMW, or Stellantis, Ferrari looks wildly overvalued (P/E of 50x+ vs. sector 8x). If you use LVMH, Hermès, or Richemont (luxury goods), the premium appears justified. Comparable selection is the most subjective - and most important - step.

The class exercise requires you to build a comps table using both auto peers AND luxury goods peers, then discuss why the implied values diverge so dramatically.

Key LearningFerrari's case teaches the most critical lesson in relative valuation: a multiple is only as good as the quality of the peer group. If you benchmark a luxury brand against commodity manufacturers, the multiple will always look "wrong." The analyst's job is to defend the peer selection with a clear business logic.

⚡ Iberdrola - Utility Sector Comps

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Iberdrola is a global leader in renewable energy. As a regulated utility, it is valued primarily on EV/EBITDA and dividend yield rather than P/E (because earnings are distorted by regulated return structures and D&A-heavy assets).

Metric	Iberdrola Focus	Why This Multiple?
EV/EBITDA	Primary multiple	Utilities are asset-heavy; EBITDA captures operating performance before massive D&A charges
EV/EBIT	Secondary	Captures actual earnings before interest/tax
Dividend Yield	Market standard	Utilities are income stocks; investors buy for stable dividend streams
P/E	Tertiary	Used but less reliable due to accelerated depreciation on regulated assets

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Exam Context: For regulated utilities, be aware that EBITDA is particularly useful because regulators allow recovery of capital through tariffs - captured in EBITDA before D&A. The regulatory compact (capex recovered via regulated tariffs) means EV/RAB (Regulatory Asset Base) is also sometimes used.

📱 Mobily (Saudi Arabia) - Emerging Market Telecom

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Etihad Etisalat (Mobily) is a Saudi Arabian telecommunications company listed on Tadawul. Valuing an emerging-market telecom adds additional complexity layers beyond standard comps.

Complexity Layer	What to Do
Country risk premium	Adjust discount rate / accept lower multiple vs. European peers
Currency (SAR vs EUR)	Use EV/EBITDA (currency-neutral) rather than absolute price comps
Regulatory environment	Different spectrum licensing, market concentration rules
Liquidity discount	Saudi market less liquid than European; may justify 10–15% haircut
Growth premium	Emerging markets often trade at premium to developed on growth-adjusted basis

💵 Building the Valuation Range - Best Practice

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A professional valuation output is never a single number - it is always a range, typically presented as a football field chart in Excel:

Valuation Range Construction: For each multiple used: Low = Target metric × (Average − 0.5 × Std Dev of peers) Mid = Target metric × Average peer multiple High = Target metric × (Average + 0.5 × Std Dev of peers) Present as horizontal bar chart (Football Field): P/E implied: [═══╠═══════════╣═════] €X.X – €Y.Y EV/EBITDA implied: [═══════╠════════╣═════] €X.X – €Y.Y DCF implied: [════╠═══════════╣════] €X.X – €Y.Y ─────────────────────────────────────────── Current Price: ────────•───────────── €Z.Z

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The Recommendation Logic: If the current market price falls below the entire valuation range → BUY. If it falls above the range → SELL. If it sits within the range → HOLD (the stock appears fairly valued). Always state your key assumption and the sensitivity driver.

Relative Valuation - Conclusions & Framework

Slides 35–38

🎯 When Relative Valuation Works - and When It Doesn't

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From Slides 35–36 - the course's summary of the method's strengths and limitations:

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Works well when:

The stocks under comparison are similar in size, industry and risk
The market is not in a bubble or a crunch
Comparables are genuinely similar - apples to apples
You have 5+ high-quality peers with observable market prices

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Breaks down when:

Entire sector is mispriced (bubble or crash)
No true comparables exist (unique business model)
Company is loss-making or pre-revenue
Accounting differences distort the denominator

Slide 35 - Core Principle"What is it? The value of a company can be estimated by looking at the market prices of 'similar' companies. Assumption: Markets are correct on average but make individual mistakes." - This is the key philosophical underpinning. Relative valuation accepts market prices as broadly efficient but looks for individual mispricings within that framework.

📈 The Numerator-Denominator Consistency Rule

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From Slide 38 - one of the most important technical rules in multiples analysis, and a frequent exam topic:

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The Rule: Since Enterprise Value (EV) equals equity value plus net debt, EV multiples must use denominators relevant to all stakeholders. Therefore the denominator must be computed before interest expense, preferred dividends, and minority interest.

Multiple Type	Numerator	Denominator Must Be...	Examples
EV Multiples	Enterprise Value (equity + debt)	Pre-interest (before deducting debt cost) → available to ALL capital providers	EBITDA, EBIT, Revenue, FCFF
Equity Multiples	Market Cap (equity only)	Post-interest (after deducting debt cost) → only what flows to equity	Net Income, EPS, Book Equity, OCF

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Classic mistake to avoid: Using EV in the numerator with Net Income in the denominator (or Market Cap with EBITDA). This mixes stakeholder perspectives - it's like comparing what you paid for an entire house to the interest income only the owner receives. The result is meaningless. Always maintain numerator/denominator consistency.

🏢 Uses of Financial Modelling - The Bigger Picture

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From Slide 7 - relative valuation is just one application of financial modelling. The full toolkit covers:

📈Corporate Valuation

💵Capital Allocation

🤝M&A Analysis

🏛Asset Valuation

📋Budgeting & Forecasting

🏛Project Finance

⚡Risk Management

Methodology	Category	Approach	When Used
Trading Multiples	Relative	Public market prices of comparable companies	Quick sanity check; equity research
Transaction Multiples	Relative	Prices paid in M&A deals for comparable targets	M&A advisory; includes control premium
DCF Model	Absolute	PV of future free cash flows at WACC	Intrinsic value; long-term investments
Dividend Discount Model	Absolute	PV of future dividends at cost of equity	Mature dividend-paying companies

Slide 10 - The Best Valuation"The most objective valuation of a company is obtained by a reliable use of both absolute and relative methodologies. Absolute valuation: A company's value comes from what it is able to generate for its shareholders. Relative Valuation: A company's value is based on the amount that the market is willing to pay for it. DCF and relative valuation techniques should be used together."

🔎 Value vs Price - The Investor's Edge

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Slide 11 - The Central Insight: "Knowing how to value corporate securities is important for investors who want to compare their valuation of a firm's securities with actual market prices." The gap between Value (what something is truly worth) and Price (what the market charges today) is where investment returns are made.

The Investor's Decision Framework: If Intrinsic Value > Market Price → BUY (you are getting more value than you are paying) If Intrinsic Value < Market Price → SELL / AVOID (the market is charging more than the asset is worth) If Intrinsic Value ≈ Market Price → HOLD / NEUTRAL (fairly priced - no strong signal either way) Your edge comes from having a better estimate of Intrinsic Value than the market consensus.

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From Slide 12: "An investment is worth whatever the other guy is willing to pay for it." This captures the relative valuation philosophy perfectly - ultimately, value is set by market participants. The analyst's job is to determine whether today's market price correctly reflects the business fundamentals, or whether a mispricing opportunity exists.

Block 2 · Pending

Free Cash Flow & FCFF

Session materials have not yet been uploaded. This page will be built once slides and exercises are provided.

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Coming Soon

Session 5 covers Free Cash Flow to the Firm (FCFF) - the foundation of all DCF models. Upload the session slides to enable full content.

Block 2 · Pending

WACC Components

Session materials have not yet been uploaded.

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Coming Soon

Session 6 covers the Weighted Average Cost of Capital (WACC) - cost of equity (CAPM), cost of debt, capital structure weights. Upload slides to build.

Block 2 · Pending

Terminal Value Methods

Session materials have not yet been uploaded.

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Coming Soon

Session 7 covers Terminal Value: Gordon Growth Model (perpetuity) and Exit Multiple approaches. Upload slides to build.

Block 2 · Pending

DCF Model & Football Field Chart

Session materials have not yet been uploaded.

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Coming Soon

Session 8 covers the full DCF model build and Football Field chart in Excel. Upload slides to build.

Block 3 · Pending

3-Statement Model - Introduction

Session materials have not yet been uploaded.

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Coming Soon

Session 9 introduces the Integrated 3-Statement Model concept and its components: Income Statement, Balance Sheet, Cash Flow Statement.

Block 3 · Pending

Income Statement Forecast

Session materials have not yet been uploaded.

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Coming Soon

Session 10 covers forecasting the Income Statement with driver-based assumptions and revenue build-up models.

Block 3 · Pending

Balance Sheet & Cash Flow Statement

Session materials have not yet been uploaded.

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Coming Soon

Session 11 covers linking the Balance Sheet and Cash Flow Statement to create a fully integrated, self-balancing 3-Statement model.

Block 3 · Pending

3-Statement - Full Model Build

Session materials have not yet been uploaded.

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Coming Soon

Session 12 is a full case study build - completing a three-statement model from historical financials to a 5-year forecast.

Block 4 · Pending

LBO Mechanics & Deal Assumptions

Session materials have not yet been uploaded.

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Coming Soon

Session 13 introduces the Leveraged Buyout (LBO) model: transaction assumptions, sources and uses of funds, and debt schedule construction.

Block 4 · Pending

LBO Model & Exit IRR

Session materials have not yet been uploaded.

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Coming Soon

Session 14 completes the LBO model: cash flow projections, debt paydown, exit assumptions, and calculating the equity IRR and MOIC.

Final Exam · Session 15

Final Exam - Preparation Guide

Computer-based cumulative examination covering all four blocks. 40% of your final grade. Review all sessions and practice the Excel models.

40% of Grade Computer-Based MCQ All Blocks Covered

40%Grade Weight

MCQFormat

4Blocks Tested

Passto Graduate

🎓 Exam Structure & Strategy

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The exam is computer-based and cumulative - all 14 teaching sessions are in scope. Grade breakdown: Final Exam (40%) + Group Work (40%) + Class Participation (20%).

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Reassessment Policy: If you receive a Fail, you may sit a reassessment within 5–10 working days of the review session. Reassessment grades are capped at Low Pass. Both grades appear on your transcript; only the reassessment grade counts for GPA purposes.

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Exam Prep Checklist: (1) Be able to compute EV, EV/EBITDA, P/E from raw financials in under 2 minutes. (2) Know the difference between LFY and NTM multiples. (3) Understand when to use EV multiples vs equity multiples. (4) Be able to structure a DCF from first principles. (5) Know the LBO waterfall: sources/uses → debt schedule → exit → IRR.

Practice & Assessment

Practice Quiz

Test your understanding across all sessions. Filter by session and difficulty level. Questions cover Relative Valuation (Sessions 1–4). More sessions will be added as materials are uploaded.

Interactive Tools

Valuation Simulator

Apply the P/E and EV/EBITDA methodologies interactively. Enter your own numbers and see the implied valuation calculated in real time.

P/E Valuation Simulator

Interactive

Price-to-Earnings (P/E) Implied Share Price

Net Income (€M)

Shares Outstanding (M)

Peer P/E Ratio (x)

Press Calculate to see results

EV/EBITDA Valuation Simulator

Interactive

Enterprise Value / EBITDA - Implied Equity Value

EBITDA (€M)

Peer EV/EBITDA (x)

Net Debt (€M)

Shares Outstanding (M)

Press Calculate to see results

PEG Ratio Simulator

Interactive

PEG Ratio - Is the Growth Priced In?

Current P/E (x)

Net Income Today (€M)

Net Income in 2 Years (€M)

Press Calculate to see results

Reference

Course Glossary

Key terms for Financial Modelling. Organised alphabetically. Use the search box to filter.

Quick Reference

Formula Cheat Sheet

Every key formula across all four blocks of the course - Relative Valuation, DCF, 3-Statement Model, and LBO. Print-friendly. Exam-ready.

Block 1 - Comps Block 2 - DCF Block 3 - 3-Statement Block 4 - LBO

01

Relative Valuation - Multiples & Comps

Sessions 1–4 · P/E · EV/EBITDA · PEG · Comps Table

P/E Ratio

P/E = Market Price per Share ─────────────────────── Earnings per Share (EPS) EPS = Net Income / Shares Outstanding Implied Price = EPS × Peer Avg P/E

Use normalised EPS - strip out one-off items. Use median peer multiple, not mean.

Enterprise Value

EV = Market Cap + Net Debt Net Debt = Total Debt − Cash EV = Mkt Cap + Total Debt + Preferred + Minorities − Cash & Equivalents

EV is capital-structure neutral - it prices the whole business regardless of how it is funded.

EV / EBITDA

EV/EBITDA = Enterprise Value ─────────────────── EBITDA EBITDA = EBIT + D&A = Net Income + Interest + Tax + D&A Implied EV = Peer Multiple × EBITDA Equity = Implied EV − Net Debt

Preferred over P/E when comparing companies with different leverage, D&A policies or tax rates.

PEG Ratio

PEG = P/E Ratio ────────────────────────────── Earnings Growth Rate (%) Growth (CAGR) = (NI_t+2 / NI_t)^0.5 − 1 PEG < 1.0x → Potentially undervalued PEG = 1.0x → Fairly valued PEG > 2.0x → Potentially overvalued

Use 2-year forward earnings CAGR. PEG breaks down for negative or very high (>100%) growth rates.

Other Key Multiples

P/BV = Mkt Cap / Book Value of Equity → Banks & financials P/CF = Mkt Cap / Operating Cash Flow → Capital-light businesses EV/Sales = EV / Revenue → Unprofitable / high-growth EV/EBIT = EV / EBIT → When D&A diff. less relevant

Always match the multiple to the sector - use EV/EBITDA for industrials, P/BV for banks, EV/Sales for pre-profit tech.

Normalisation Adjustments

Normalised NI = Reported NI + Restructuring charges (add back) + Asset write-downs / impairments + One-off litigation costs − Gains on asset disposals − Non-recurring income ± Stock-based compensation (judgment)

Always use normalised / adjusted EPS in comps tables. Raw reported figures distort comparisons.

02

Discounted Cash Flow - DCF Model

Sessions 5–8 · FCFF · WACC · Terminal Value · NPV

Free Cash Flow to the Firm (FCFF)

FCFF = EBIT × (1 − Tax Rate) + Depreciation & Amortisation − Capital Expenditure (Capex) − Increase in Working Capital -- Or starting from Net Income: -- FCFF = Net Income + D&A + Interest × (1−Tax) − Capex − ΔWorking Capital

FCFF is available to ALL capital providers (debt + equity). It is the cash flow discounted at WACC.

WACC - Weighted Average Cost of Capital

WACC = Ke × (E/V) + Kd × (D/V) × (1−T) Ke (Cost of Equity - CAPM): Ke = Rf + β × (Rm − Rf) Rf = Risk-free rate (gov't bond) β = Beta (systematic risk) ERP = Equity Risk Premium (Rm−Rf) Kd (Cost of Debt): Kd = Yield on company debt Tax shield: Kd × (1 − Tax Rate) V = E + D (total capital)

Use market value weights (not book). WACC is the discount rate for FCFF in the DCF model.

Terminal Value - Gordon Growth Model

TV = FCFF_n+1 / (WACC − g) FCFF_n+1 = Final year FCFF × (1 + g) g = Long-term sustainable growth rate (typically 2–3%, close to GDP growth) -- g must be < WACC, or formula breaks -- PV of TV = TV / (1 + WACC)ⁿ

Terminal value often represents 60–80% of total DCF value - be conservative with the growth rate assumption.

Terminal Value - Exit Multiple Method

TV = EBITDA_n × Exit EV/EBITDA Multiple Exit multiple = Peer group current multiple (often same as entry multiple or entry + 25–50 bps wider) PV of TV = TV / (1 + WACC)ⁿ -- Cross-check: Gordon Growth vs Exit Multiple should give similar TV. If not, revisit growth rate or multiple assumption. --

Exit multiple method links DCF back to market pricing. Use both methods as a sanity check on each other.

DCF Valuation - Full Build

Enterprise Value (DCF) = Σ [FCFF_t / (1+WACC)^t] + PV(TV) t=1 to n Equity Value = EV − Net Debt − Minorities − Preferred Price per Share = Equity Value / Shares

Typical forecast horizon: 5–10 years. Always run sensitivity tables on WACC (±50bps) and g (±0.5%) to show the value range.

Present Value & Discount Factor

PV = CF_t / (1 + r)^t Discount Factor = 1 / (1 + r)^t NPV = Σ [CF_t / (1+r)^t] − Initial Investment IRR = Rate where NPV = 0 → Solve iteratively in Excel: =IRR(cash_flow_range)

In Excel: =NPV(rate, CF1:CFn) discounts CF1 onwards - add CF0 separately. =IRR() requires at least one sign change in the cash flows.

03

The Integrated 3-Statement Model

Sessions 9–12 · Income Statement · Balance Sheet · Cash Flow

Income Statement Structure

Revenue (Sales) − Cost of Goods Sold (COGS) ───────────────────────────── = Gross Profit − Operating Expenses (SG&A, R&D) − Depreciation & Amortisation ───────────────────────────── = EBIT (Operating Income) − Interest Expense + Interest Income ───────────────────────────── = EBT (Pre-Tax Income) − Income Tax (EBT × Tax Rate) ───────────────────────────── = Net Income

Gross Margin = Gross Profit / Revenue. EBITDA Margin = EBITDA / Revenue. Net Margin = Net Income / Revenue.

Balance Sheet - Core Identity

Assets = Liabilities + Equity Assets: Current Assets (Cash, AR, Inventory) + Non-Current (PP&E, Intangibles) Liabilities: Current (AP, Accruals, ST Debt) + Non-Current (LT Debt, Deferred Tax) Equity: Share Capital + Retained Earnings + Other Comprehensive Income Retained Earnings (t) = RE (t−1) + Net Income − Dividends

If the balance sheet doesn't balance, the model is broken. Cash is the plug - it absorbs the difference after all other items are determined.

Cash Flow Statement Structure

Operating Cash Flow: Net Income + D&A (non-cash, add back) + Decrease in Working Capital − Increase in Working Capital ───────────────────── = CFO Investing Cash Flow: − Capex (asset purchases) + Asset disposals = CFI Financing Cash Flow: + Debt raised − Debt repaid − Dividends paid = CFF Net Change in Cash = CFO + CFI + CFF

Cash flow from operations is the most important line - it shows whether the business generates real cash. Profitable ≠ cash generative.

Working Capital

Net Working Capital = Current Assets − Current Liabilities (excluding cash & short-term debt) NWC = Accounts Receivable + Inventory − Accounts Payable − Accrued Liabilities DSO = AR / Revenue × 365 (days sales outstanding) DIO = Inventory / COGS × 365 (days inventory) DPO = AP / COGS × 365 (days payable) CCC = DSO + DIO − DPO (cash conversion cycle)

An increase in NWC is a cash outflow (you're tying up more cash in the business). Forecast NWC as % of revenue or using DSO/DIO/DPO days.

PP&E Roll-Forward Schedule

PP&E (gross), end of year: = PP&E (gross), beginning + Capex − Asset disposals (cost) Accumulated Depreciation, end: = Accum. Dep., beginning + Depreciation expense − Disposals (accum. dep. portion) PP&E (net) = Gross − Accum. Dep. Depreciation → Income Statement (EBIT) → Cash Flow (add back)

The PP&E schedule is a key supporting schedule. Capex flows to the investing section of the CFS. D&A flows to both the IS and the CFS add-back.

Three-Statement Linkages

Income Statement → Balance Sheet: Net Income → Retained Earnings (Equity) Income Statement → Cash Flow: Net Income → CFO (starting point) D&A → CFO add-back Balance Sheet → Cash Flow: ΔNWC → CFO adjustment ΔDebt → CFF ΔCapex → CFI Cash Flow → Balance Sheet: Ending Cash → Cash on Balance Sheet -- All three must balance simultaneously --

Build the IS first, then the BS (excluding cash), then the CFS. Cash is the last item - it is the plug that makes the BS balance.

04

Leveraged Buyout (LBO) Financial Model

Sessions 13–14 · Sources & Uses · Debt Schedule · Exit IRR · MOIC

Sources & Uses of Funds

USES (what the money buys): Equity Purchase Price + Refinancing of existing debt + Transaction fees & expenses ───────────────────────── = Total Uses SOURCES (where the money comes from): Senior Debt (bank loans) + Subordinated / Mezzanine Debt + Equity (PE sponsor) ───────────────────────── = Total Sources Sources must equal Uses exactly. Entry EV = Entry EBITDA × Entry Multiple Equity = Entry EV − Total Debt

Typical LBO structure: 60–70% debt, 30–40% equity. Debt capacity is sized at 4–6× EBITDA for senior; 1–2× for mezz.

Debt Schedule

For each debt tranche (Senior, Mezz...): Beginning Balance − Mandatory Amortisation − Cash Sweep (excess cash) ───────────────────────── = Ending Balance Interest Expense = Avg Balance × Interest Rate Cash Available for Debt Service: EBITDA − Tax − Capex − ΔNWC − Mandatory Amortisation Repay senior first (waterfall order)

Model each tranche separately. Senior debt is repaid first, then mezz, then equity receives residual. The cash sweep accelerates debt paydown.

Exit Value & Equity Return

Exit EV = Exit EBITDA × Exit Multiple Exit EBITDA = EBITDA in exit year (Year 5) Exit Multiple ≈ Entry Multiple (±0.5x) Equity Proceeds = Exit EV − Remaining Debt (all tranches) − Transaction costs MOIC = Equity Proceeds / Initial Equity Typical targets: MOIC ≥ 2.0–2.5x over 5 years IRR ≥ 20–25%

Value creation in an LBO comes from three sources: EBITDA growth, multiple expansion, and debt paydown (deleveraging). Decompose the return into all three.

IRR - Internal Rate of Return

IRR solves for r in: 0 = −Equity₀ + Σ [CF_t / (1+r)^t] In Excel: =IRR(equity_cashflows) Cash flows for IRR: Year 0: −Initial Equity (negative) Year 1–4: Dividends / distributions Year 5: +Equity Proceeds at exit Shortcut approximation: If MOIC = 2.0x over 5 years → IRR ≈ 15% If MOIC = 2.5x over 5 years → IRR ≈ 20% If MOIC = 3.0x over 5 years → IRR ≈ 25%

IRR is time-sensitive - the same MOIC achieved in 3 years gives a much higher IRR than in 7 years. Quick exits are highly valued in PE.

LBO Value Creation Bridge

Return Attribution: Entry Equity → Exit Equity + EBITDA Growth: (Exit EBITDA − Entry EBITDA) × Multiple + Multiple Expansion: Entry EBITDA × (Exit Mult − Entry Mult) + Debt Paydown: Net Debt (entry) − Net Debt (exit) Sum of three = Total equity value created Best LBOs: EBITDA growth is the primary driver

A deal that relies on multiple expansion is riskier - it requires markets to re-rate the asset. Operational improvement (EBITDA growth) is the highest-quality return driver.

Key LBO Credit Metrics

Leverage Ratio: Total Debt / EBITDA → target ≤ 6.0x at entry Interest Coverage (DSCR): EBITDA / Interest Expense → target ≥ 2.0x Debt / Equity Ratio: Senior Debt / Equity → typical 1.5–2.5x Cash Interest Coverage: (EBITDA − Capex) / Cash Interest → ≥ 1.5x Debt Paydown Test: Year 5 Net Debt / EBITDA → target ≤ 3.0x (shows deleveraging progress)

Lenders set covenant thresholds on these ratios. A breach triggers a covenant violation - the lender can demand immediate repayment or renegotiate terms.

Quick Reference - All Multiples at a Glance

Summary

Multiple	Formula	Numerator	Denominator	Capital Structure	Best Sector
P/E	Price / EPS	Market Cap	Net Income	Equity only	Mature profitable companies
P/BV	Price / BV per Share	Market Cap	Book Equity	Equity only	Banks, financials
P/CF	Price / OCF per Share	Market Cap	Operating Cash Flow	Equity only	Capital-light businesses
PEG	P/E ÷ Growth %	Market Cap	NI × Growth	Equity only	Growth companies
EV/EBITDA	EV / EBITDA	EV	EBITDA	Neutral ✓	Industrials, telecoms, PE
EV/EBIT	EV / EBIT	EV	EBIT	Neutral ✓	When D&A differences minor
EV/Sales	EV / Revenue	EV	Revenue	Neutral ✓	Pre-profit / high-growth tech
EV/FCF	EV / FCF	EV	Free Cash Flow	Neutral ✓	Mature cash generative firms

Excel Shortcuts & Functions

Model Toolkit

Financial Functions

=NPV(rate, CF1:CFn) -- PV of future cash flows (CF1 onwards) -- =IRR(cashflows_range) -- IRR of a cash flow series -- =XNPV(rate, cashflows, dates) -- NPV with irregular timing -- =XIRR(cashflows, dates) -- IRR with irregular timing -- =PMT(rate, nper, pv) -- Loan / annuity payment --

Remember: =NPV() does NOT include Year 0. Add the initial investment separately: =NPV(r,CF1:CFn)+CF0

Lookup & Structure

=IFERROR(formula, 0) -- Trap divide-by-zero errors -- =IF(condition, value_true, value_false) -- Conditional logic -- =INDEX(range, MATCH(lookup, col, 0)) -- Flexible 2D lookup -- =AVERAGE(range) / =MEDIAN(range) -- Peer multiple aggregation -- Ctrl+[ → trace precedents Ctrl+] → trace dependents

Use MEDIAN for peer multiples to avoid outlier distortion. Use IFERROR to handle n.a. P/E when earnings are negative.

Sensitivity Analysis

Data Table (2-variable): Data → What-If Analysis → Data Table Row input cell: e.g. WACC Column input: e.g. g (growth) Goal Seek: Data → What-If → Goal Seek Set cell: IRR cell To value: 20% By changing: Entry Multiple Scenario Manager: Base / Bull / Bear scenarios → saves multiple input sets

A 2-variable data table showing EV at different WACC × growth combinations is a mandatory deliverable in any DCF model.