Financial modelling
Building a model in a spreadsheet: assumptions, calculations and results kept apart, financial functions (PV, FV, PMT, NPV, IRR), cash flow forecast, scenarios, sensitivity analysis and simulation by random draws.
- 25 cards
- 5 topics
- Free
The outline, topic by topic
Each topic is weighted the way the exam weighs it.
- Concepts
- Questions
- Sort and link
- The numbers
- Scenarios
A few cards from the deck
Assumption: what is it?
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An input value of the model, chosen by its author rather than computed: a rate, a price, a volume, a term.
It is entered once, in a separate area, and the formulas point to it. That way, changing a rate in one place recalculates the whole model with nothing forgotten.
For the monthly payment of a loan at 3.6% a year over 20 years, which formula is right (B1: principal, B2: annual rate, B3: term in years)?
=PMT(B2/12, B3*12, -B1)=PMT(B2, B3, -B1)=PMT(B2/12, B3, -B1)=PMT(B2, B3*12, -B1)
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=PMT(B2/12, B3*12, -B1)Rate and number of periods must use the same unit: monthly rate (B2/12) and number of months (B3*12). Mixing years and months gives an absurd result, for example €7,200 a month if the /12 is forgotten.
In a good model, the … are entered separately, the … point to them with cell references, and results are read in an output area.
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In a good model, the assumptions are entered separately, the calculations point to them with cell references, and results are read in an output area.
This separation makes the model auditable: at a glance you see what is assumed, what is computed and what is concluded.
Scenario: what is it?
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A coherent set of assumptions describing a possible future, usually pessimistic, central or optimistic, applied together to the model.
Unlike sensitivity, which varies one assumption at a time, a scenario changes several together: demand falls at the same time as price.