Financial Modeling

  

Categories: Metrics, Accounting, Banking

The process of using existing data to predict how a company or investment is going to behave financially in the future.

In the business news world, we often hear about things like “predicted earnings” and “predicted growth.” We might come across statements like these: “The Wax Candlestick Co. fell short of its predicted sales goals for the quarter, and now its stock is in the toilet.” So...where do these predictions come from? Are they using some kind of crystal ball? Tarot cards? Tea leaves? A Ouija board? Professor Trelawney in the tower?

No, what they’re using is something called financial modeling. A company takes all of its data, all of its numbers, that deal with whatever category of business they’re trying to predict (earnings, growth, sales, revenue, whatevs). Then they look at how those numbers have changed over time, taking care to account for outside influences like new laws, economic changes, interest rate hikes, and the like. Then experts apply their, you know, expertise...to all of that data, and try to predict how those numbers might change over the next month, quarter, year, or beyond. Companies and their investors then use those predictions—those financial models—to guide their business and investment decisions.

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Finance: What is a WACC Model?18 Views

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Finance allah shmoop What is a lack model That's whack

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Yeah it is people We had to go there once

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okay we're done Quack stands for weighted average cost of

00:15

capital and whoa yeah that's a mouthful heavy term but

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the concept's pretty simple All right Well let's say you

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run the famed charcoal smoker producer grills grills grills or

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grilles Cubed is matthew people like you said and you

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want to buy We've got gas The finest purveyor of

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propane grills on the market which will help grills Grilled

00:41

grills rule the outdoor barbecue market no matter what their

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customers Fuel of choices Well you need to borrow a

00:47

ton of money to buy out your competitors A billion

00:50

dollars worth of borrow in fact it's so much dough

00:53

that you have to borrow it from three different places

00:57

Well the money you're borrowing is the capital You need

01:00

to buy your target We've got gas That's your target

01:03

Okay capital c and wacker at least one Well the

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bank demands that the bank comes first in priority Should

01:11

things you know go awry and you go the b

01:14

word Yeah Bankruptcy We we don't like to say that

01:17

too loudly Run banks Okay well the bank will loan

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you two hundred million dollars and we'll charge you five

01:22

percent interest on that money That five percent is your

01:25

cost of capital from that bank lender for funding round

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number two while you turned a sweet and beatrix who

01:33

in addition to being a killer grill meister in her

01:36

own right Well she also happens to be loaded So

01:39

anti b agrees to loan you the second traunch of

01:42

money and we'll come in second in priority behind the

01:45

bank in collecting her dough Should you know the b

01:48

word happened She'll own you seven hundred million at seven

01:52

percent interest Great So now you only have to raise

01:55

your last hundred million box and it has to come

01:58

third in the priority stack up of collecting Should things

02:01

go you know awry With no other options you hit

02:04

up tony mafia ony the shadiest loan shark on either

02:07

side of the mason dixon So you pay your respects

02:10

you know just the glove with tongue and things get

02:13

a little weird But somehow at the end of the

02:15

day you walk away from tony's headquarters with a wallet

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full of cash as your stomach is full of non

02:22

amalfi onis sunday raghu what That last hundred million box

02:26

comes with a very high interest price Twelve percent So

02:31

when the tony notes ironically that quack is the same

02:34

noise that baseball bats make when they hit knees when

02:38

will you pay attention And you do the math keenly

02:40

aware that the waiting's here are very different looks like

02:44

this and that the huge middle traunch of seven hundred

02:47

mil it's seven percent has the biggest effect on your

02:50

cost of capital because well it's a big fat seventy

02:53

percent of the total amount you're borrowing Well the first

02:55

two hundred mill is cheap at five percent and it

02:57

costs you ten million bucks here to rent that money

03:00

The second trunk of seven hundred million is kind of

03:02

sort of mad sheepish at seven percent and it costs

03:05

forty nine mil a year to rent and that last

03:08

traunch of one hundred mil is super expensive for what

03:11

you're getting costing you twelve million a year to rent

03:14

So you add up the capital rental costs of ten

03:18

plus forty nine plus twelve and you get seventy one

03:21

million box to rent a billion dollars for this transaction

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that seventy one mil to rent a bill and pay

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that runs So what is your whack or weighted average

03:32

cost of capital Well seventy one million over a billion

03:36

or seven point one Percent The black models always percentage

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Some companies will use their stock to buy a competitor

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er rather than using cash But that's not always the

03:46

case and calculating the cost of equity is way more

03:49

complex and involves a lot more smoke and or mirrors

03:52

So we're just doing debt here people and there you

03:54

have it Whack in a nutshell But you know what's

03:57

not whack shmoop snu finance themed hip hop album on

04:00

sale soon coming soon to a itunes thinking you're you 00:04:04.93 --> [endTime] yeah we'll eat your heart out there hamilton

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